Tuesday, January 17, 2023

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.


18 comments:

  1. can social security be inflated away? ;)

    ReplyDelete
    Replies
    1. Of course it can. After all, if Weimar, Brazil, Argentina. Turkey and even Zimbabwe could do it why can't the mighty US do it, too? Humphhh :)))))

      Delete
  2. Check out the graph of mandatory spending as a percentage of the federal budget in Wikipedia -

    https://en.wikipedia.org/wiki/Mandatory_spending#/media/File:Mandatory_Spending_as_a_Percent_of_the_Federal_Budget.png

    "Mandatory" spending has grown so much over the decades that it is now crowding out other spendings. This is unsustainable and will be addressed one way or another. Raising taxes is one possibility but it will prove to be a futile exercise. Out of control spending is the culprit here.

    ReplyDelete
    Replies
    1. Cutting Social Security, Medicare and Medicaid will provoke a revolution. Remember, these are "benefits" that people paid for through payroll deductions while they were working. It's the government that is in trouble here, since it uses these funds as just another revenue stream, instead of investing the money productively in a real pension fund (well, it buys Treasury bonds with the money, ie it borrows the money and uses it as it pleases).

      Delete
    2. No, we never fully paid for these "benefits". Medicare/Medicaid is one example. It went from 1.7% of GDP in 1975 to 5.7% in 2008. It is on track to grow to 1/5 of the GDP within a decade! How could this be "paid for"? No country can afford this level of spending.

      Delete
    3. I fully understand what you mean, nevertheless 99.9% of the working men/women will not see it this way. In their mind, they have money deducted from their paycheck therefore THEY PAID FOR IT. I must admit, they are not far wrong - it is up to the government to use the money appropriately. Perhaps, even, to increase the payroll tax rate if this is necessary to cover actual costs.

      Delete
    4. To A. in re healthcare spending.
      I looked up some data: Healthcare spending in the US went from 5% of GDP in 1960 to 17% in 2010 and has been broadly steady since. So, Medicare/Medicaid has risen in line with total healthcare spending.

      The problem is that the US has, BY VERY FAR, the highest healthcare expense as % of GDP among all nations. For example, France is at 12%, Japan at 11%, Israel at 8% to mention a few.

      Why is that? Because the system is 100% private AND because the legal system (torts) allows immense damage rewards, forcing everyone to charge way more than necessary to cover the huge insurance premium costs. And who benefits in the end? Certainly NOT the patients/public. By most measures, Americans are the most unhealthy people on Earth.

      Delete
    5. Some relevant health facts:

      LIFE EXPECTATION
      Japan #1 in world at 85 years
      USA #46 at 79.1 years

      OBESITY
      USA #1 in world at 40% of population (excluding the tiny island nations of South Pacific)
      Japan #154 at 4% of population

      I rest my case...

      Delete
    6. about the obesity, there is definitely something wrong with the U.S. food... I know many people who gained enormous amounts of weight after moving to the U.S.... In addition, I have noticed some U.S. cats are grossly obese... I have never seen anything like that in any other country... I dunno what is wrong, but something is surely wrong...

      Delete
    7. Fast food, huge portions, lots of sugar and fat in everything. Only countries where people are fatter are American Samoa, Kiribati, etc… and guess where they get ther food from?

      Delete
    8. Hell - I disagree that the healthcare system is 100% private. Household spending on healthcare has stabilized at around 8% of household budget since 2014. That is probably equivalent to about 6% of GDP. So the bulk of healthcare spending is public spending. Obamacare subsidizes healthcare spending for huge percentage of the population. We need to limit public health spending to the taxes collected or increase tax collection to match the spending. The current system is unsustainable.

      https://www.bls.gov/opub/btn/volume-9/how-have-healthcare-expenditures-changed-evidence-from-the-consumer-expenditure-surveys.htm

      Delete
    9. When I said 100% private I was not referring to who pays for it, but who gets paid. In the case of, say, France, Italy, Germany etc. most healthcare providers are state owned/employed by the state. In the US they are private corporations or self employed practitioners.

      Another huge issue is drugs and such.. in the EU the state dictates prices to the pharma industry - take it or leave it - and thus keeps prices low (and graft pretty common, but...). The US, on the other hand, has truly insane drug prices.

      Delete
    10. Yes, US healthcare system is mostly private. But without bloated government spending/subsidies, it will likely cost significantly less. Perhaps we should reform the system, e.g. "dictates prices", and accept the consequence of price control, or get Europe to pay their 'fair' share haha.

      Delete
  3. If you look at this from a birds eye view, it’s plainly obvious that raising corporate taxes is the lever to pull. What are the arguments against this? Or I suppose what is the catch with it? Because it just seems too simple. I am assuming wage growth will slow and some companies will choose to relocate to another country?

    ReplyDelete
    Replies
    1. i suspect it is hard to enforce... the corporates will move declared income somewhere else...

      Delete
    2. I think the obstacle to raising corporate taxes is that our demo-cracy has evolved into a corpo-cracy, ie the power emanates from inside the boardroom instead of the ballot box.

      Delete
    3. Plutocracy indeed. Government by the rich and for the rich. And corporations tend to be the rich.

      Delete