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Can You Balance the Federal Budget?

Can You Balance the Federal Budget?. Grab a worksheet, see what you can do, and maybe go to Washington, D.C. 2011 “Facts”. The 2011 Federal Budget Deficit will be about $1645 Billion. Total Federal Taxes will be only $2174 Billion. Total Federal Spending will be $3819 Billion.

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Can You Balance the Federal Budget?

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  1. Can You Balance the Federal Budget? Grab a worksheet, see what you can do, and maybe go to Washington, D.C.

  2. 2011 “Facts” • The 2011 Federal Budget Deficit will be about $1645 Billion. • Total Federal Taxes will be only $2174 Billion. • Total Federal Spending will be $3819 Billion. • $3819 - $2174 = $1645 Billion increase in the National Debt

  3. Trends in Federal Taxes • Individual income tax collections as a share of total national income have been declining over time • Corporate income tax collections have been fairly stable over time • Payroll taxes have also remained stable over time • Total Federal taxes, as a share of total national income, are now at their lowest point in 30 years

  4. Taxes, Spending & Deficits • Even though tax rates have declined, strong income growth has made the total $ collected in Federal taxes rise nearly every year • Federal spending has grown much faster than tax revenues, resulting in large budget deficits nearly every year since the early 1980s • The current “Great Recession” has depressed taxes and increased spending, dramatically increasing the Budget Deficit to $1645 Billion

  5. What’s the Cure? To reduce or eliminate the budget deficit • Spending must be decreased and/or Taxes must be increased • Top 5 spending items are 70% of total spending: Defense, Social Security, Medicare, National Debt Interest and Medicaid. • Debt Interest cannot be cut. Total spending outside of top 5 items is < $1645 Billion. • Grab a worksheet and see if you can find $1645 Billion in spending cuts to balance the budget

  6. Need for New Taxes? • If spending can’t be cut by $1645 Billion, then taxes must be increased to decrease the Budget Deficit • Personal income taxes comprise about half of total taxes, corporate income taxes comprise 15% and payroll taxes the rest. • Who’s paying the income tax and how much?

  7. The richest 5% of taxpayers pay nearly 60% of all income taxes, while earning 35% of all income. Average tax rates are 23% for the top 1%, 17% for the next richest 4%, and then fall below 13% for everybody else.

  8. The 12/17/10 Tax Agreement Decreased Taxes $505B in 2011 and $385B in 2012 • Extension of GW Bush income tax cuts • $40 Billion for preserving lower capital gains, dividends and maximum income tax rates • $70 Billion for taxpayers subject to Alternative Minimum Tax (> $175,000 income taxpayers) • $35 Billion for increasing the Estate Tax Exemption from $1 to $5 million and decreasing the rate to 35% • $120 Billion for Middle Income taxpayers • $120 Billion for Payroll tax cut of 2% (only 2011) • $120 Billion for extra Business tax credits

  9. Possible Options in 2012? • In 2012, the 2% decrease in the payroll tax will expire, so payroll tax collections will increase $120 Billion • Each 1% drop in unemployment reduces the Budget Deficit by $100 Billion (less $ for unemployment and more taxes paid on incomes and profits • Best deficit scenario under present policies if economy rebounds: $1325 Billion in 2012

  10. What’s Should Washington Do? • Most Economists believe that Budget Deficit levels should be compared to National Income levels. • The 2011 deficit is about 10% of Total US income which is not sustainable. Think Greece & Ireland • Decreasing the 2012 deficit from $1325 to $700 Billion would bring it to about 3% (also a Euro-zone target) of total income, which would balance the National Debt and Total National Income levels • Problem: raising taxes or reducing government spending could keep unemployment high

  11. Will it be possible for D.C. politicians to either cut spending and/or raise taxes by $625 Billion per year if they want to be re-elected? • Large programs like Defense, Social Security, Medicare and Medicaid are where the money is. A 5% cut to them reduces spending by $120 Billion (=25% of needed cuts). • Watch for disguised tax hikes and spending cuts, e.g.: • Tax simplification that limits deductions for state taxes, mortgage interest, medical deductions, etc. • Smaller inflation adjustments for Social Security, Medicare, Defense, etc.

  12. Thank you for your interest. Department of Economics Iona College

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