Balancing the Federal Budget Requires Tax Increases

The Tea Corporate Front Organization has managed to elect several members of congress on a core promise of fiscal responsibility. Another of their vows is to maintain low tax rates for all Americans and to reduce those rates in future. These two promises resonate with just about everybody. The trouble is the arithmetic doesn't allow it. If America is to fix its structural federal budget deficit, tax rates will have to rise.

In fiscal year 2010 (which ended September 30), the federal government spent around $3.6 trillion, or about 24% of Gross Domestic Product. Government receipts were close to $2.2 trillion. The balance was financed by borrowing, which is money taken from future generations to be spent now. Morally, this latter can only be justified if the money borrowed went to programs and projects that enhance the economic and/or social future of America. Few would argue that Uncle Same spent $1.4 trillion in that way.

So how did the Feds spend the money? Defense and Security got about $715 billion; Social Security accounted for $708 billion; combined Medicare, Medicaid and CHIPs (a health program for children) got $753 billion. Taken together, these just about used up all of the government's revenue. Interest on the national debt ate up a further $209 billion. Social safety net programs (such as food stamps, earned-income and child tax credits, Supplemental Security Income for the elderly or disabled poor and unemployment insurance) cost $482 billion. Pensions and benefits for federal retirees and veterans was around $220 billion, education along with scientific and medical research cost about $180 billion combined, transportation infrastructure spending totaled about $108 billion, non-security foreign spending (medical and disaster aid, embassy upkeep, etc.) was $36 billion or so. The balance of under $200 billion comes from all other federal spending combined.

Balancing the budget with spending cuts alone can happen mathematically, but clearly it would be more than painful. A 39% across-the-board cut does bring expenditures and revenues into balance, but some items are sacrosanct. For instance, interest on the debt must be paid, or the entire global economy will seize up when the markets stop believing in the US dollar and Treasuries. Getting rid of federal and veteran pensions is not feasible, and cutting them is problematic at best. Cutting Social Security by 3.9% would have seniors howling (they complained when there was no cost of living increase this year), let alone a 39% cut. Ditto Medicare. Cutting defense spending with two wars going on (which means loads of equipment must be replaced) and Al Qaeda hovering in the wings is hardly palatable.

What's left to cut? An end to social safety net programs, an end to transportation spending, an end to non-security foreign spending, and the deaths of the "other" programs still leave a deficit of over $500 billion. Those cuts would be socially devastating, and the job still isn't completed.

While a recovering economy will boost revenues and reduce safety net spending, a booming economy won't cover the entire $1.4 trillion shortfall. Higher tax rates are the only solution, and letting the Bush tax cuts expire for everyone (not just the rich) still leaves the accounts in the red. The Treasury believes letting the cuts expire would add $3.7 trillion to government revenues over the next 10 years. A $1.4 trillion annual shortfall means $14 trillion added to the debt over 10 years -- less $3.7 trillion still means adding more than $10 trillion to the debt. Tax rates even higher than those prior to the Bush cuts are needed, as are spending cuts. Americans are emotionally and psychologically unprepared to pay for all the government they consume.

Hiking everyone's taxes by 10-15% does get the job done along with spending cuts of 5-10% across the board. And the cries of agony will be deafening. Now, who in Washington wants to be fiscally responsible?

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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