The presidential candidates talk about taxes and budget cuts but they don’t clearly state the trade-off. That is the purpose of this article. It is based on federal government data for the year 2010. Current budget amounts are higher but the account proportions are about the same.
First, how high are realized tax rates? The average tax rate after adjustments is about 25 percent of Gross Domestic Product. That is, taxes are about equal to 25 percent of the value of all goods and services produced in the U.S. The average tax rate for the other 33 developed countries is about 35 percent of their GDP. On average U.S. taxes are lower than those in other developed countries.
In the U.S. 42 percent of federal revenue comes from personal income taxes, 40 percent from payroll taxes (Social Security, Medicare, etc.), 9 percent from corporate income taxes and 11 percent from other sources. The average realized tax rate for the wealthiest 1 percent of the population is 30 percent while the average federal tax rate for individuals is about 20.9 percent. Many of the largest U.S. corporations pay little or no federal income tax because of special exemptions.
Mandatory (pre-committed) federal expenditures total about $2.2 trillion while discretionary expenditures total about $1.4 trillion. The federal budget totals about $3.6 trillion. GDP is about $14 trillion.
The largest discretionary expenses include the following:
Defense: $664 billion
Health: $79 billion
Transportation: $72 billion
Veterans: $52 billion
State Department: $52 billion
Housing: $47 billion
Education: $47 billion
Homeland Security: $43 billion
Energy: $26 billion
Agriculture: $26 billion
Justice: $24 billion
NASA: $19 billion
EPA: $10 billion
Others: less than $10 billion each.
The largest mandatory (benefits previously promised) expenses include:
Social Security: $695 billion
Medicare/health: $743 billion
Welfare: $571 billion
Debt interest: $164 billion
Candidate Romney pays 13 percent in federal Income tax. Let’s assume that he feels that this rate is good for everyone. 13 percent of $14 trillion GDP amounts to about $1.8 trillion. This is not enough to cover the largest mandatory expenses with nothing left for other expenses. Alternatively, suppose everyone pays the current average rate of about 21 percent. This generates about $2.9 trillion in revenue. This is enough to cover mandatory expenses. To cover the discretionary expenses requires deficit spending or a shut down in most of the federal government if defense spending is maintained.
The number of federal workers in 2010 was only about 300 more than in 1960. Since 1975 there has been a shift of government work to private contractors. This is inefficient since private costs exceed federal cost because of the demand for private profit.
You may ask, “How did we get into this situation where tax cuts necessitate draconian reductions in required services?” These would be reductions that injure the middle class and the poor the most (a clear moral issue). The basic reasons are as follows.
• Since about 1970 about all economic productivity increases have gone to the wealthy in huge salaries, bonuses, stock returns and tax breaks. Middle and lower incomes have actually declined in purchasing power. The poor are now even poorer with the collapse of the real estate market. The large increase in personal debt and resultant bankruptcies was related to borrowing by households to attempt to restore their declining economic status.
• While the wealthy have gotten higher pre tax incomes, their after tax incomes have risen more since tax rates on their sources of income have declined. Many companies have shifted higher value production to underdeveloped countries leaving U.S. citizens to try to survive on low-wage service jobs which cannot be outsourced.
• U.S. financial institutions have grown extremely wealthy and powerful by creating financial situations where they realize great profits when things go their way (higher fees, financial speculation) but pass the loss onto the public when things don’t work out (subprime cash, etc.).
How does the country get out of this predicament? This involves some of the following.
• Increase marginal progressive tax rates on very high incomes (those in the top 10 percent) to where they were following WW II (50+ percent).
• Reregulate the financial markets to increase competition and end unnecessary speculation. Identify and penalize industry profiteers.
• Strengthen union membership.
• Strengthen public education, especially at the elementary level and help finance retraining of displaced workers.
• Stop getting into wars that primarily benefit corporations and destroy families. War-related excess corporate profits should be heavily taxed as they once were.
The U.S. is now like a starving person and eating less brings death. More food (employment) is needed and only the federal government can make this happen by restoring economic equity to its citizens. We learned this after 1935 but lost our way in the 1970s.