The middle class is shrinking. Those in power have run up enormous debts on public credit while shoveling most of the money into private pockets. The corporations that have benefitted from this borrowing binge, meanwhile, leverage the global trade system to transfer their profits beyond the reach of national governments.

Meanwhile, we have been told lies by Democrats and by Republicans, divided into artificial camps and led into debates that are either irrelevant or so dramatically scripted that we fail to realize every choice leads to the same result: the dismantling of the social framework that defined and sustained the opportunity of the last century. National mobilization of resources has given way to radical individualism under a narrative that, in the wealthiest nation in the world, we must always expect less.

In this tumultuous time, we search for a way forward - a new Square Deal for the American people.

Tuesday, November 22, 2011

Budget Realities

This morning, driving to work, I listened to someone from Americans for Prosperity arguing that instead of cutting funding to the Department of Defense (DoD), we should cut funding to the Corporation for Public Broadcasting (PBS).

I hear such claims far too often, and enough is enough.

Whether PBS deserves to be funded by taxpayers is a matter up for debate. Whether the funding that goes to PBS is in any way comparable to the funding that goes to the DoD, however, is not.  Take a moment to explore with me the realities of the Federal budget, including our deficit -- the amount that we spend each year beyond what we bring in.

For the sake of simplicity, we will work from the figures presented by the Office of Management and Budget (OMB) for Fiscal Year 2010.

Revenues

In FY 2010, the U.S. government brought in $2.16 trillion in total revenues, broken out as follows:
  • $899 billion in personal income taxes
  • $865 billion from payroll taxes
  • $191 billion in corporate taxes
  • $67 billion in excise taxes
  • $140 billion in other revenues
Payroll taxes include those that pay for Social Security and Medicare (FICA).  Other revenues refers to rents, royalties, and recoupments that the Federal government receives for use of public lands and resources as well as other income.

Something interesting to note: FICA is tallied as 12.4% of income up to $106,800 per year plus a mere 3.3% additional tax on all income, yet it raises nearly as much reveue as the entire graduated income tax system with its top tax rate of 35%.  FICA is a flat tax with no deductions.

Spending

In FY 2010, the U.S. government had $3.45 trillion in total spending, broken out as follows:
  • $793 billion for Medicare and Medicaid
  • $701 billion for Social Security
  • $689 billion for the Department of Defense
  • $660 billion in other discretionary spending
  • $416 billion in other mandatory spending
  • $197 billion in interest on the National Debt
Mandatory spending gets its name from the way that it is funded: each year, unless Congress votes to restrict the money that goes to a mandatory program, it gets its previous year's allocation along with a formula-established increase. 

Among other allocations included under the umbrella of the $416 billion of other mandatory spending are:
  • $83 billion for Federal civilian retirement
  • $82 billion for the Internal Revenue Service (Treasury)
  • $70 billion for the Interstate Highway System (Transportation)
  • $70 billion for Veterans benefits (Veterans Affiars)
  • $43 billion for Military retirement (Defense)
The $660 billion in non-defense discretionary spending, meanwhile, breaks down this way:
 

Deficit

Given $2.16 trillion in and $3.45 trillion out, the U.S. government had a deficit of $1.29 trillion in FY 2010.  Because total FICA receipts are tallied as revenue, this deficit is what we still had to borrow after allocating any money brought in by the Social Security tax beyond what we paid out.

The national debt of the United States stands at $15 trillion, the accumulated results of year after year spending more than we brought in.  Given our current deficit of $1.29 trillion per year, that puts us on track to reach $20 trillion within just a few years.

The Cut, Cap, and Balance Model

Now that we have the figures on the table, we are ready to discuss the Republicans' Cut, Cap, and Balance plan.  Under this model, we will:
  1. Raise no new revenues; while we
  2. Maintain the military budget at current levels (including Veterans benefits); and
  3. Put the country on a track that will pay off the national debt.
As long as we bring in less than we spend, we cannot pay off the national debt.  Paying off a debt requires a sustained, year-after-year surplus in the same way that growing a debt requires a year-on-year deficit. 

Any sustained surplus will eventually pay off a debt -- smaller surpluses take longer, but they still make progress -- so for the sake of argument, let's say that we aim for a surplus of $1 billion.  That's a pretty low bar, and given the performance on Congress these last few years, there's no reason to make things harder than they need to be.  A total budget of $2161 billion and would make Cut, Cap, and Balance and success.

Now, keep in mind that we can't create a surplus by cutting Social Security benefits.  I don't mean this morally or ethically.  FICA is a dedicated tax that pays Social Security benefits.  To avoid raising taxes (which we have established we will not do), we can't cut benefits unless we offset these by cutting FICA. 

Within supply-side circles, there may be economic arguments to doing that (e.g. lower taxes create jobs, etc.), but in terms of balancing the budget, Social Security "is what it is."

We also have no choice but to continue paying the year-to-year interest on the debt, which is what prevents our debt from growing should be attain a balanced budget.

Since cutting Social Security has no effect and because we have exempted military spending, we have $1707 billion that is untouchable:
  • $701 billion going to Social Security
  • $696 billion going to the Pentagon
  • $197 billion going to interest on the debt
  • $70 billion going to Veterans benefits
  • $43 billion going to military retirement
That means that, keeping current taxes as they are, the Cut, Cap, and Balance plans leaves us $454 billion to cover all expenses beyond Social Security and the military.

Reality Check: What can we afford?

Under Cut, Cap, and Balance, it is immediately apparent that the $454 billion pool of money left to allocate after we cover Social Security and the military is too small to cover the Medicare and Medicaid programs, which come to $793 billion.  Thinking that we could even devote what we have to those, though, misses a few important points.

What about the Department of Homeland Security (DHS), for instance?  Its operations are outside of the military, so it hasn't gotten anything in our budget yet.  DHS includes the Coast Guard, and surely under any model that enshrines military spending, we can agree that the Coast Guard is important too.  Let's assume that we will impose austerity and reduce the DHS budget for $43 billion to $30 billion.

The Department of Justice (DOJ) consumes another $28 billion, and that includes the Federal Bureau of Investigation (FBI).  We need that, too.  Let's be tough with them too, and give DOJ only $24 billion.

We have $400 billion left to allocate.

Now, $82 billion goes to the Internal Revenue Service (IRS), and we are assuming no change in total tax revenues, or our entire exercise falls apart.  The only way to do that is to keep tax collections on track.  $82 billion approved for the IRS.

Forget about the Departments of Education, Energy and the Interior.  Those are Republican punching bags, as is the Environmental Protection Agency.  They're all gone.

Hmm.  Federal pensions.  That's $83 billion, and you know, most private-sector workers don't get pensions anymore.  There's enough in the fund to cover current workers, so let's end Federal pensions for new hires.  Zero.

But what about the Interstate Highway System?  Not only does the money the Department of Transportation (DOT) gives to the states provide for the upkeep of highways important to our businesses and industries, it also serves as one of very few levers available to the U.S. government to exert leverage over the states.  If we don't pay that, we'll lose the roads and the leverage.  We'll keep the $70 billion for Interstates, and we'll cut the DOT's operating budget in half.  $80 billion allocated.

We still have $238 billion left.

The State Department uses $28 billion right now.  Diplomacy is for wimps.  Let's cut that in half.  $14 billion for State, with zero for foreign aid.  We just can't afford it.

Beyond Veterans benefits, the Department of Veterans Affairs (VA) has a budget of $52 billion.  That includes the Veterans Health Service.  Hmm.  Socialized medicine; we don't need that.  Shut that down, and reduce the funding to $40 billion to obtain care from the private sector.

What about Labor and Commerce?  Those seem reasonably useful.  Each gets about $14 billion now.  Let's cut each one to an even $10 billion, for a total allocation of $20 billion.

We still have $164 billion!  How hard is this, really?

Oh... wait.  We never did anything with Medicare or Medicaid, did we?  Those programs cost $793 billion as they are, but we only have about a fifth of that available. 

We haven't even looked at NASA -- what about going to Mars?  And are we really going to eliminate the Department of Agriculture (USDA)?  Who will inspect the food? 

Okay, NASA gets $15 billion and USDA gets $20 billion.  They'll just have to make it work.

That leaves us $129 billion, and that just has to go to seniors.  Yes, we might like to offer benefits to the poor -- things like food stamps and healthcare -- but there are almost 40 million seniors, and they vote! 

So, let's see... $129 billion divided by 39.4 million seniors equals...

$3274.11 per senior to cover annual healthcare costs.  Let's send checks and tell them to buy their own coverage.  The private sector will find a way to make it work.

And we're done: $2161 billion.

What our budget would look like

Well, that was quite an exercise, wasn't it?  I'm sure we all learned something -- and I'll bet everyone now understands in stark terms that we had a spending problem, not a revenue problem.

Here's how our new budget breaks down:


But perhaps it is more illustrative to show it this way:


That's right: under cut, cap, and balance, you would pay the same amount in taxes that you pay today, but 42% of your tax dollars would be directed to military and security programs.

There would be no Federal money for education.

There would be no Federal stewartship of the environment.

There would be reduced oversight of food and drug safety.

And if you imagine for one moment that we could sustain -- indeed, that a democratic society would allow -- a situation in which just 7% of tax dollars would go to programs that benefitted children or working families, I'd suggest that you go back and give this some more thought.

But don't worry.  We'd only have to sustain this peculiarly balanced budget until our $1 billion surplus paid off the national debt in a mere 329 years.  And hey, if we're in a hurry, we could always make more cuts to that pesky 7% of taxes that actually goes to benefit taxpayers.

Bottom Line

Don't be played for a fool.  There is doubtless waste in the Federal budget, just as there is waste in every private-sector company.  (Every round of layoffs demonstrates how unnecessary all of those workers were.)

But whatever merit there is to cutting spending, we cannot balance the budget with spending cuts while maintaining our defense and security programs, much less pay down the national debt.  Anyone who tells you that we can is saying one of two things:
  1. He or she secretly plans considerable cuts (50% or more) to defense spending; or
  2. He or she has no intention of ever balancing the budget.
Be careful what you wish for.  You may find that you pay the same taxes only to get nothing at all.

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