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. $ $2174 = $1645 Billion increase in the National Debt

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

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

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

Federal Spending in Billions of Dollars Change Your 2012 Cuts ?? Defense Social Security Medicare Interest on National Debt Medicaid Other Public Assistance Unemployment Insurance Federal employee retirement Food & Nutrition Assistance Transportation Elementary, Secondary & Voc.Ed Income Security for Veterans Housing Assistance Federal Law Enforcement & Justice International Affairs Veterans Medical Care Natural Resources & Environment Science, Space & Tech General Govt Administration Energy028 Development & Disaster Relief Agriculture2625 Social Services13217 Post Office and Housing Credit61712 Veterans Ed & Training1119 Total:1645 Billion ???

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?

IRS Federal Personal Income Tax Data, 2008 IncomeAdjusted GrossAverage Share of BracketIncome Range IncomeTax Rate Total IncomeTotal Taxes Top 1%> $380,354$1,204, %20.00%38.02% 1-5% $159,619 - $380,354$221, %14.73%20.70% 5-10% $113,799 - $159,618$132, %11.03%11.22% 10-25% $67,280 - $113,798$86, %21.62%16.40% 25-50% $33,049 - $67,279$47, %19.86%10.96% Bottom 50%< $33,048$15, %12.75%2.70% 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.

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

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

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

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.

Thank you for your interest. Department of Economics Iona College