The Budget Deficit

In yesterday's post I suggested that the budget deficit should be eliminated, or at least sharply reduced.  Here is a chart of budget surplus/deficit as percent of GDP - see below.

 As we can see, the US is running deficits not seen since WWII - a highly dangerous situation that IMHO could  lead to bankruptcy if not immediately and firmly addressed. May I remind readers that Greece went bankrupt during the PIIGS crisis (2010-12) when its budget deficit reached 15%.

In my previous post I suggested some tax increases, which prompted readers to suggest spending cuts, instead - without being specific, however.  Therefore, here's another graphic showing sources of federal spending and revenue.

Almost two thirds (63%) of federal spending is mandatory, basically Social Security, Medicare and Medicaid.  It would be political suicide to cut spending there.  Another 8% is net interest on the debt, also impossible to cut without defaulting.  Therefore, 71% of spending cannot be reduced, except in extremis.

This leaves defense spending at 14%, which could surely be slashed - but only at the cost of ending Pax Americana. Not exactly an option at this time.  Thus, we are down to the last 16% - which is everything else from NASA to FDA. It's obvious that not much can be cut there and it won't make much of a difference on the deficit, anyhow.

Moving on to the revenue side, it becomes immediately obvious that corporate income tax at 9% is very, very low.  The corporate tax rate today stands at an almost all time low of 22.50%;  compare this to 45% in 1984 when Ronald Reagan was President, for example.  In extremis, again, yes corporate taxes should be raised sharply.  And I do mean sharply - back to 45%.

 Individual taxation is a huge 53% and, when combined with payroll taxes at 32% (ie social security contributions) it means that individual labor is a taxation pool where 85% of revenue comes from - and don't forget that many States impose their own individual income taxes, too. Yes, I'm all for a much higher "millionaire tax", particularly on stock options, benefits, expense accounts, etc. but mostly for social justice reasons, since it won't raise much revenue.

This leaves the 6% "other" portion, which by definition won't do much to raise revenue - unless the US institutes a national sales tax/VAT scheme and raises taxes on fuels.

It is easy and popular - populist even - to suggest spending cuts like the Republicans are doing right now.  But it just won't do much for the deficit.  The real answer is this, again in extremis:

1. Pass a "balanced budget amendment" that will reduce the deficit to zero in an organized way.  It should initially focus on reducing the primary deficit (ie before interest expense) before moving on to the entire deficit.
2. Raise taxes as above.
3. Cut spending where it could be done.