Transparency 16-1 What Are the Major Federal Taxes? Personal income tax Corporate income tax Social security tax

Transparency 16-2 Exhibit 1 Major Federal Taxes SOURCE: Council of Economic Advisers, Economic Report of the President, 1999.

Transparency 16-3 Three Income Tax Structures Exhibit 2

Transparency 16-4 What are the Major Federal Government Spending Programs? National defense Income security Health Medicare Social security Net interest on the National Debt

Transparency 16-5 Exhibit 3 Major Federal Spending Programs SOURCE: Council of Economic Advisers, Economic Report of the President, 1999.

Transparency 16-6 DEBT AND DEFICITS BUDGET DEFICITS occur when government expenditures exceed tax receipts A BUDGET SURPLUS occurs when tax receipts exceed government expenditures

Transparency 16-7 CYCLICAL DEFICITS The portion of the deficit that is a result of an economic downturn many economists (Keynes) believe that deficits are natural and necessary during recessions because tax revenues fall and benefit payments rise Our problem is that we have continued to run deficits in expansionary periods

Transparency 16-8 STRUCTURAL DEFICITS The structural deficit is the portion of a budget deficit which exists when the economy is operating at full employment Total Budget Deficit = structural deficit + cyclical deficit

Transparency 16-9 National Debt NATIONAL DEBT is the total sum of what the federal government owes its creditors (the sum of past deficits)

Transparency Exhibit 5Public Debt for 1987–1999 The 1999 amount is for November SOURCE: Bureau of the Public Debt.

Transparency Deficits and Debt as % of GDP Exhibit 5

Transparency NATIONAL DEBT As the debt grows, interest on the debt grows in its share of the budget. The portion of the budget that can be cut in order to balance the budget is SHRINKING

Transparency PORTION OF THE BUDGET THAT IS CONSIDERED UNTOUCHABLE Interest on the Debt 14% Social Security 22% untouchable total 36% National Defense 20% Total 56%

Transparency WHO BEARS THE BURDEN OF THE DEBT? CURRENT GENERATION - if crowding out occurs then households are giving up consumption to pay for increases government spending FUTURE GENERATIONS - will have to pay higher taxes to pay off the bonds when they come due. They bear the cost while the bondholders receive the payoffs.

Transparency COUNTERPOINT WE-OWE-IT-TO -OURSELVES - if American taxpayers make payments to American bondholders, money is simply shifted from one pocket to another. Only works if debt is held domestically (currently 14-18% is held by foreigners)