Solutions: Taxes Joseph J. Minarik Committee for Economic Development

Why are we talking about taxes at all? Why not just cut spending? The problem is just too large. Many want spending cuts only, but add, “Don’t touch my Social Security and Medicare.” Then, there is defense… Interest on the debt is a growing part of the problem. But you can’t cut interest independently; you need other savings to reduce interest. Some believe that only cutting spending would be unfair, or would harm the economy (research, highways, etc.).

2009 Spending2009 Revenues Non-Defense Discretionary: $581 Medicare: $425 Social Security: $678 Other Entitlements: $990 Net Interest: $187 Defense: $657 Social Insurance and Retirement Receipts: $891 Excise Taxes: $62 Other: $98 Deficit: $1,413 Individual Income Taxes: $915 Corporate Income Taxes: $138 Billions of DollarsSource: Budget Historical Tables

2009 Spending Defense, Medicare, Social Insurance, and Interest: $1,946 Other Entitlements and Non-Defense Discretionary Spending: $1, Deficit Deficit: $1,413 Billions of DollarsSource: Budget Historical Tables Only 11 percent larger than the deficit

But even “other” spending can be important Veterans Transportation Administration of Social Security and Medicare Law enforcement Education (including student loans) Medicaid (otherwise funded by the states)

Nondefense Appropriations

“Other” Entitlement Spending

And even “other – other” spending can be important When you have a tax question and you call the IRS, do you want someone to answer the phone? When you need a passport in a hurry, do you want to stand in line? If you are a federal contractor, do you want someone to cut your check? How do you feel about safe food and water?

And the big kahuna: Aging. More elders means more Social Security benefits. More elders means more Medicare cost – even if we slow the rate of growth of healthcare prices. And the growing population of “old-old” – those 85 and over – means more spending for long-term care.

Conclusions on Spending Do we need to cut spending? Absolutely. We will need to take every dollar that isn’t nailed down – and some that are. But cutting spending will be very hard – not just “waste, fraud and abuse,” not just foreign aid, or Congressional salaries, or earmarks. So, can we solve the problem only with spending cuts? No.

When looking at the deficit, and from an international perspective, three parts of the U.S. federal tax system stand out: The corporate income tax – it has gotten smaller; The Social Security / Medicare payroll tax – it has gotten larger; and Taxes on consumption (excise taxes) – they are much smaller than in other countries.

Tax Revenues By Type Of Tax Individual Income Tax Corporate Income Tax Payroll Tax Excise Taxes Other

Total Revenue 15 Major European Countries United States

Individual Income Tax Revenue 15 Major European Countries United States

Consumption Tax Revenue 15 Major European Countries United States

Top Individual Statutory Rate 15 Major European Countries United States

Top Individual Statutory Rates

Corporate Income Tax Revenue 15 Major European Countries United States

Corporate Statutory Tax Rate 15 Major European Countries United States

Corporate Statutory Tax Rates

Corporate Tax “Effective Rate”

Corporate Effective and Statutory Rates Effective Statutory

Why Does This Happen? “Tax Expenditures”

Tax Expenditures (Percent of GDP)

Conclusions There is no realistic way to solve the budget problem without some new revenues. We need to fix our corporate income tax. People want individual income tax simplification and reform, too. We are out of step with the rest of the world not to have a federal-level tax on consumption.