It’s the Tax Rate Stupid

Much has been written since Congressman Paul Ryan (R-WI) and President Barak Obama have released competing budget plans for Fiscal Year 2012 and much more will surely follow as the FY 2012 budget debate heats up.

Ryan’s plan has been hailed as “courageous” since he dared to propose cuts in entitlement spending for Medicare and Medicaid, while leaving Social Security untouched. Ryan’s plan fails to pass the sniff test for actual budgetary reform as his plan simply focuses on one side of the budget equation – spending, and does nothing to address revenue.  This is the equivalent of your monthly budget of $5,000 while you only bring in $3,500 a month.  Your fix to the problem?  Cut your grocery expenses by 20%.  The math simply doesn’t add up.

On the other end of spectrum, President Obama addresses the revenue issue by stating he wants to restore the high end tax rates on the wealthy to the rates of the Clinton years, but does little to address mandatory spending which accounts for the vast majority of the budget expenses. 

There is so much hyperbole going on it’s time to settle on some simple facts:

FACT #1:  Neither plan does anything to balance the budget.  In fact, the only thing either plan does is slow the rise of the overall debt.  Both plans claim to reduce deficits by roughly $4 trillion over the next decade, but deficits and debt are two completely different animals.

FACT #2:  The Fiscal Year 2011 budget that was finally passed (some 6 months after it should have been) calls for estimated spending of $3.82 Trillion!  Estimated revenues for the year - $2.17 Trillion.  The net differential: $1.65 Trillion – there’s your budget deficit. - - Under the Obama and Ryan plans, they’re proposing whittling down the annual budget deficits, over 10 years, by about $4 Trillion or so.  Neither even proposes a balanced budget somewhere along the way.

FACT #3: The FY 2011 budget contains $2.4 Trillion of Mandatory Spending.  These are government mandated spending obligations the government cannot back out of.  They include: Social Security, Medicare, Medicaid, Interest on the Debt, government pensions, Unemployment insurance and Food Stamps.  The delta between Mandatory Spending and projected revenues for FY2011 is roughly $200 billion.  That’s $200 billion that needs to be borrowed simply to meet the government’s statutory obligations.

FACT #4:  All that other spending to the tune of $1.4 Trillion to pay for things like Defense, Transportation, Veterans Affairs, etc. all is being done right now on borrowed dollars.

FACT #5:  Both Republicans and Democrats will spin the numbers in a convincing way over the next several months to sway a public that ultimately will not care an iota about the facts but simply acquiesce to the partisan proposal and tell anyone that disagrees with them how wrong they are.

Here’s the thing, and it shouldn’t take a rocket scientist to figure this one out, the government is spending more than it can afford.  Cutting spending alone isn’t going to balance the equation (see above) You’d still have to borrow $200 billion simply to meet statutory spending this year, therefore in addition to spending cuts revenues must be raised – period.  We’ve been down this path before so instead of rewriting what I’ve already written, let’s just look at a picture…I offer below what the historic debt has been as a percentage of GDP while laying a bar under the debt that shows the highest marginal tax rate on the wealthy during the years.  [I also include a table at the end of this article that lays it out year by year.]

Some wish to cast this argument as class warfare, or soaking the rich, and nothing could be further from the truth.  We are at a point in the national debt debate that all Americans are going to have to feel some level of pain – whether that means loss of or reduction to services or a slight hike in their taxes.  In the grand scheme of things, having a millionaire paying an extra 3% on his or her taxes while families in America are losing homes, heating oil, or food on the table is hardly equates as wealth redistribution.

While this doesn’t have to be a permanent position, it’s a good bet that it will take a decade just to be at a point where the budget can begin to run a surplus – and that’s with significant cuts to discretionary spending as well as reform of Medicare and Social Security, but if it’s done in a vacuum without at least raising taxes to the levels they were during the Clinton Administration, then we might as well forget about trying to balance the budget, or paying down the national debt.  Let’s just party like we’re Americans and if and when the bill comes due – and it will! – then we can do the American thing and just declare bankruptcy – make it someone else's problem.

In the meantime, we can have great knockdown drag out fights over the peanuts in funding the National Endowment of the Arts, Public Broadcasting and Planned Parenthood.  It will make for great theater, and be absolutely meaningless in the grand scheme of things.

As we march down the path of the budget (and debt) debate, let's keep in mind what the facts really are and not get caught up in the rhetoric that both Republicans and Democrats are going to be throwing out there.  Educate yourself - check the numbers - do the math.  It's actually easier than high school algebra if you try it and it will help you not be fooled by the politicians this time around.  Hope you enjoy playing with the numbers :)

Tax Year	High Rate	High Income
2011	35%	379,150
2010	35%	373,650
2009	35%	372,950
2008	35%	357,700
2007	35%	349,700
2006	35%	336,550
2005	35%	326,450
2004	35%	319,100
2003	35%	311,950
2002	38.6%	307,050
2001	39.1%	297,350
2000	39.6%	288,350
1999	39.6%	283,150
1998	39.6%	278,450
1997	39.6%	271,450
1996	39.6%	263,750
1995	39.6%	256,500
1994	39.6%	250,000
1993	39.6%	250,000
1992	31%	86,500
1991	31%	82,150
1990	28-33%	32,450-162,770
1989	28-33%	30,950-155,320
1988	28-33%	29,750-149,250
1987	38.5%	90,000
1986	50%	175,250
1985	50%	169,020
1984	50%	162,400
1983	50%	109,400
1982	50%	85,000
1981	70%	215,400
1980	70%	215,400
1979	70%	215,400
1978	70%	203,200
1977	70%	203,200
1976	70%	200,000
1975	70%	200,000
1974	70%	200,000
1973	70%	200,000
1972	70%	200,000
1971	70%	200,000
1970	70%	200,000
1969	70%	200,000
1968	70%	200,000
1967	70%	200,000
1966	70%	200,000
1965	70%	200,000
1964	77%	400,000
1963	91%	400,000
1962	91%	400,000
1961	91%	400,000
1960	91%	400,000
1959	91%	400,000
1958	91%	400,000
1957	91%	400,000
1956	91%	400,000
1955	91%	400,000
1954	91%	200,000
1953	92%	200,000
1952	92%	200,000
1951	91%	200,000
1950	91%	200,000
1949	91%	200,000
1948	91%	200,000
1947	91%	200,000
1946	91%	200,000
1945	94%	200,000
1944	94%	200,000
1943	88%	200,000
1942	88%	200,000
1941	81%	5,000,000
1940	79%	5,000,000
1939	79%	5,000,000
1938	79%	5,000,000
1937	79%	5,000,000
1936	79%	5,000,000
1935	63%	1,000,000
1934	63%	1,000,000
1933	63%	1,000,000
1932	63%	1,000,000
1931	25%	100,000
1930	25%	100,000
1929	25%	100,000
1928	25%	100,000
1927	25%	100,000
1926	25%	100,000
1925	25%	100,000
1924	46%	500,000
1923	58%	200,000
1922	58%	200,000
1921	73%	1,000,000
1920	73%	1,000,000
1919	73%	1,000,000
1918	77%	1,000,000
1917	67%	2,000,000
1916	15%	2,000,000
1915	7%	500,000
1914	7%	500,000
1913	7%	500,000

select sources used:

http://www.nytimes.com/interactive/2010/02/01/us/budget.html

http://www.washingtonpost.com/wp-srv/special/politics/budget-2010/

http://en.wikipedia.org/wiki/2010_United_States_federal_budget