Sunday, July 10, 2011

Budget numbers--Taxes!

As stated in the previous post, the government spent $3.4Trillion, and took in $2.2Trillion in revenue, leaving a $1.2Trillion gap.  So let's look at the revenue side, shall we?

Of the $2.2Trillion, the vast majority of it came from personal income taxes and social insurance taxes (Social Security and Medicare taxes) 42% from the former and 40% from the latter. (Again, I'm using the Congressional Budget Office's figures here.) So US citizens paid out of their pockets $1.8 Trillion in taxes in 2010.  Corporations' paid taxes too; about 9% of government revenues came from corporations, or $198 Billion, and the remaining 9% came from "Other sources," and I'm not sure what that is/where that comes from...I'm assuming capital gains tax and inheritance taxes among others...

(As a side note, that means that Social Insurance programs took in about $880 Billion, but spent $1.4 Trillion...there's $400 Billion of our budget deficit right there...)

The CBO website has a fascinating graph that is part of a presentation made by Douglas Elmendorf, Director of the CBO which you can see here.  I'll convert one of the graphs to a chart for reference here. (So actual numbers are the product of eyeballing the graph...there may be some +/-...)

Quintile                                  Tax rate, % 1989                 %1999                   % 2007        
Highest                                           25+                                  27                           25
Fourth                                             20                                    20                        17/18
Middle                                            17                                    16                           15
Second                                            14                                    13                        12/11
First (lowest)                                   8                                      6                             4

So a few things I take from this. 1) There is a difference in terms of income levels and the rate of taxation, and personally I find that appropriate. The graph doesn't say what the cut-off levels are for quintiles, and I'm curious about that. 2) Revenues have averaged 18% of GDP since 1971 (but with no real trend), and dropped to 15% in 2007.  Our expenditures have steadily risen in that period, and jumped massively in 2006/7 and beyond.

Common sense would indicate that returning tax rates to their 1999 levels would be a smart move to make as a way to increase revenues and help to resolve the budget deficit.  Or a compromise would be to return half-way to the 1999 level, so a 1 or 2% increase in taxation rates for each quintile, which would spread the pain around somewhat.  Either generates needed revenue! This is looking solely at the numbers, and indeed, is a statement that doesn't take the current recession into account. It would also hit the lowest quintile the hardest, and I'm not sure that that would be a socially responsible thing to do.  Maybe the highest two quintiles go back to 1999 fully, the lower goes to the halfway point...

Given that there appears to be a linkage in joblessness and taxation rates in the minds of Dim Tim and his Republican cohort, is there a correlation between the two? According to (which pulled its numbers from the US Department of Labor), in 1989 the unemployment rate stood at 5.26%. By the end of George H.W. Bush's term it was 7.49%. Under Clinton it dropped to 3.97% by 2000. Under Bush II it climbed to 5.99% in 2003, bounced a bit until hitting 5.79% in Bush II's last year. Under Obama, it skyrocketed to 9.2% in his first year, and last year sat at 9.6%. (And yes, I'm well aware that there are all kinds of problems with how we calculate unemployment statistics.  It doesn't matter here; any adjustment made causes all numbers to rise, so the trends remain the same...)

Democrats and Republicans can make whatever arguments that they want to about which party did what.  BUT, if you overlay the above information about tax rates on top of unemployment rates, it seems that a strong argument could be made that there is not a real linkage between the two.  We'd need a larger data set to really show causality.  However, I feel comfortable in saying that by implementing the Bush II tax cuts, Congress apparently did not make a difference in the creation of jobs; indeed, jobs continued to be lost as taxes went down and stayed down.

Moreover, corporations are sitting on massive amounts of profit (according to the New York Times, 3rd Quarter profits sat at $1.6Trillion) yet yearly revenues of $168Billion (indicated above) is less than a 10% taxation rate, a far cry from the posted 35% corporate tax rate.  As corporations are getting by with such low taxes and aren't hiring workers, it would appear that an argument can be made that there is no linkage between lower taxes and higher employment rates.  If that 3rd quarter alone were taxed at 35%, that would generate about $560 Billion in revenue, which would go a long way toward closing the budget deficit without sacrificing spending...(And yes, I'm aware that all those profits are not made in America, so there are some problems with how to determine what to tax.  Still, there be money to be made in them thar hills...)

Perhaps a deal could be offered.  The government will agree to a) declare profits to be the corporate equivalent of income, not capital gains, and b) lower the 35% rate to the highest individual quintile's tax rate if, and only if, corporations hire American workers.  Those who create jobs become eligible for the lower rate.  Those that don't, stay at 35%.  And I'm only talking about the Multi-National Corporations, I'm not talking about small business owners making below the $250,000 profit levels.  Leave them alone.

So the bottom line on taxation as a means to solve the budget deficit is that there is a way to reconfigure taxes to generate more revenue, and the government needs to generate more revenue.  It appears that the more people who are working, the more income is made, which means more taxation can be brought in. Corporations appear to be getting a nearly free ride, so I'd be much more in favor of going after them in a manner that links their tax status to their hiring practices.  Thus, revenue doesn't have to directly come on the backs of the citizenry.  Of course, since corporate profits are generated from consumer spending, we end up paying the money one way or another, right?

My conclusion is that combined with across the board, reasonable spending cuts, raising taxes in a fair and balanced way on the American public, coupled with doing better than a 10% rate of collection from corporations is a sensible way of bringing the budget into balance.

Again, all this serves to close the budget deficit, but it doesn't address the National just keeps it from growing larger....

1 comment:

  1. As a far left socialist myself, I say sock it to those corporations. After all, the Supreme Court has recently decided that they are really "individuals," so I suggest it's well within the government's purview to tax them as such. . . . and since I, a poor retired teacher, pay at the 15% rate, I think the corporations should be at least right up there with me... I like your ideas here, but they are way too sensible for the folks in D.C.