Sunday, January 6, 2013

If You Don't Want to Increase Revenues, Where Do You Want to Cut Spending?

January 6, 2013

If You Don’t Want to Increase Revenues, Where Do You Want to Cut Spending?

The table below is from the September 2012 U.S. Treasury monthly statement. It shows by function Treasury receipts and outlays. I want to concentrate on the middle column, which shows Treasury receipts and outlays for fiscal year 2012. Total receipts in FY 2012 were $2,449.093 billion and total outlays were $3,538.446 billion, resulting in a budget deficit of $1,089.353 billion. 

Let’s add up what was spent in FY 2012 on defense, veterans’ benefits/services, Social Security, Medicare and interest on the public debt. This sum, which I will call the untouchables, totals $2,272.563 billion. This sum, the untouchables, represents 64.2% of total outlays and 92.8% of total receipts. Let’s look at the untouchables in another way. Total revenues minus the untouchables amounted to $176.530 billion. Total outlays minus the untouchables amounted to $1,265.883 billion. So, assuming that the majority of American households does not want to cut spending on defense, veterans’ benefits, Social Security and Medicare and further assuming that the majority of American households views servicing the public debt as the long-run beneficial thing to do, there is not much left over of tax revenues to fund the other 35.8% of federal outlays. In FY 2012, “left over” tax revenues represented just 13.9% of residual outlays, i.e., total outlays minus the untouchables.

For the sake of argument, let’s assume that the following governmental functions were eliminated: expenditures on international affairs (e.g., foreign aid and defense of our foreign embassies), natural resource/environment (the EPA, ugh!), agriculture (who needs food inspectors?) and education/training/employment/social services (we don’t need those Washington bureaucrats telling us how to turn out world-class scholars in Mississippi). How much would the elimination of these functions saved in FY 2012? $197.853 billion. Let’s keep cutting. Let’s eliminate expenditures on science/space/technology, energy, transportation, community & regional development, justice and general government. What would this have saved us in FY 2012? $282.631 billion. So, eliminating all of this would have knocked $480.484 billion off the $1,265.883 billion of non-untouchable expenditures in FY 2012. Where’s the really big money in the non-untouchables category? Health (Medicaid) and income security (unemployment insurance), which totaled $888.934 billion.

So, the really big categories of federal spending are welfare to senior citizens regardless of their income and/or wealth, welfare to poor “junior citizens”, defense and servicing the public debt built up due to persistent federal budget deficits over the past decades. This is not to say that cutting federal spending by just one dollar is a wasted effort. But if one is serious about significant federal budget deficit reduction, one will have to get serious about cutting welfare for seniors, welfare for juniors and welfare for defense contractors. As I showed in my January 3, 2013 blog post, growth in total federal revenues in the past 10 fiscal years has been considerably below its long-run median growth. So, if one is serious about significant federal budget deficit reduction, one will have to get serious about raising more federal revenues – more revenues from households with incomes below $450,000. Keep in mind that with the passage of the American Tax Relief Act of 2012 (that’s what all the drama was about in Washington last week) and with the new taxes going into effect in this year associated with the Affordable Care Act, our federal tax rate schedule for individuals will now be more graduated (or, as some prefer to say, more progressive) than it has been in decades.

Paul L. Kasriel


Thursday, January 3, 2013

Have the Democrats just been Br'er Rabbited?

January 3, 2013

“Do Anything You Want to Us, Br’er Democrat, but Please Don’t Force Us to Make Permanent the Bush Tax Rates for 98% of Households,” Pleaded Br’er Republican
(with apologies to Joel Chandler Harris)

This is not intended as a politically-partisan note, but rather a description of strategic bargaining in action. To wit, did the Democrats just get Br’er Rabbited by the Republicans with the enactment of the American Taxpayer Relief Act (ATRA) of 2012, the legislation that made permanent the Bush 43-era individual income tax rates for the first $450k of household income? The CBO estimates that ATRA will reduce individual federal income tax revenues by $3.75 trillion in the 10 years ended fiscal 2022 compared to what would have been.

Both Democrats and Republicans have been advocating a roughly $4 trillion cumulative 10-year reduction in deficits projected under tax-and-spend schedules prevailing in 2012.  The Democrats have been arguing for an approach to long-run deficit reduction that is “balanced” between increased revenues and decreased expenditures. But if you have just reduced 10 years of revenues by $3.75 trillion compared to what they would have been with the expiration of Bush 43 tax rates for all, how are you going to come close to $4 trillion in 10-year deficit reduction without massive cuts in federal expenditures?

With the enactment of ATRA, the exceptionally low individual tax rates that apply to most households are permanent (until legislation is passed to change them) – something Republicans have long sought.  Something else that the Republicans have long sought is a reduction in future deficit by curbing expenditures. If the body politic is serious about slowing down the growth in public debt (I am not sure it really is) and $3.75 trillion of revenues have been forfeited to that end, then massive expenditure cuts are the alternative by default, or there will be a default.  Br’er Republican pleaded not to be thrown in the ATRA “briar patch” by Br’er Democrat to no avail. It would appear that Br’er Democrat just got outfoxed by Br’er Republican.  

Br’er Democrat, however, might be able to win the day with his own briar-patch ploy. Republicans want to cut government expenditures by “reforming” entitlements such as Social Security and Medicare. In the past, this has been anathema (I have always wanted to use this word) to Democrats. But what if after a token protest by the Democrats to the “concept” of entitlement reform, the Democrats succumbed with a caveat. That caveat being to means test Social Security and Medicare. That is, as one’s retirement income increased, one’s Social Security benefit would decrease and one’s Medicare premium, including and especially, one’s Medicare Part A premium, would rise. If means testing senior-citizen entitlements were to occur, then not only would upper-income retirees be paying higher tax rates than they were in 2012, but they would be receiving effectively lower entitlement benefits. So, perhaps Br’er Democrat should plead not to be thrown into the entitlement-reform briar patch by Br’er Republican.
Now to some facts. The Republicans argue that “Washington” does not have a revenue problem, but a spending problem. The chart below speaks to this issue. Plotted in the chart are the 10-year compound annual growth rates of total federal government receipts and outlays. In the 10 years ended FY 2012, the compound annual growth rate in federal receipts was 2.83%, considerably below its FY 1965 – 2012 median of 6.75%. Notice that since FY 2003, about the time of the second round of Bush 43’s tax cuts, growth in federal receipts has been much below its longer-run median rate.  In the 10 years ended FY 2012, the compound annual growth in federal outlays was 5.81%, below its FY 1965 – 2012 median of 7.31%, but not as much below its median as was receipts growth. In the 10 years ended FY 2009, compound annual growth in federal outlays hit a recent high of 7.51% , in part because of TARP expenditures, increases in automatic-stabilizer expenditures such as food stamps and unemployment insurance benefits and, of course, Obama’s “stimulus” expenditures.  Since FY 2009, however, growth in federal outlays has been trending lower.

I conclude from these data that the explosion in deficits in the past 10 years has more to do with Washington having a revenue “problem” than a spending “problem.” In the next 20 years, Washington is, however, likely to have a spending problem as more and more of my baby-boomer generation belly up to the entitlement trough. And now with the bulk of the Bush 43 tax rates permanent, Washington will continue to have a revenue problem, too.

Paul L. Kasriel