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FEDERAL BUDGET MYTHS AND REALITIES Empowering citizens with knowledge necessary to shape the nation’s future.

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Presentation on theme: "FEDERAL BUDGET MYTHS AND REALITIES Empowering citizens with knowledge necessary to shape the nation’s future."— Presentation transcript:

1 FEDERAL BUDGET MYTHS AND REALITIES Empowering citizens with knowledge necessary to shape the nation’s future

2 Deficit Fever Is it a disease or a symptom? How sick is the patient? What’s the cure?

3 Basic Contentions 1.Since 1981, tax policies rather than spending decisions have been the main drivers of deficits. 2.Insofar as spending should be cut, we must not treat the largest annual expenditure—on wars and the military—as untouchable. 3.We won’t successfully solve our problem unless we recognize the underlying force driving all phases of our economy and politics. (We won’t name that force for now.)

4 Clearing the Air Myth: Social Security spending adds to deficits and therefore must be “fixed.” Reality: Social Security is a self-funded trust fund. Its annual surplus is always used to mask the real size of the deficit. The latest treasury estimate is that, left alone, Social Security will continue to run surpluses for another 25 years.

5 MEDICARE It is also a self-funded trust fund and adds nothing to deficits. It will stop running surpluses in 10 years, however. So, considered separately, it will need fixing soon. That fix will only succeed if the U.S. finds a way to control its exceptionally high and ever-escalating health care costs—the subject of a different discussion than our discussion today. 5

6 Myth: Lowering taxes on the wealthy encourages investment and job creation. Reality: During the 8 Clinton years, 23.1 million jobs were created. During the 8 G.W. Bush years, when taxes on capital gains, dividends and estates were drastically lowered, only 3 million jobs were created. 6 Clearing the Air 2

7 Taxes and Investment “I have worked with investors for 60 years and I have yet to see anyone—not even when capital gains rates were 39.9 percent in —shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.” Warren Buffet, “Stop Coddling the Super- Rich,” The New York Times August 14,

8 The Three Causes of Deficits and Debt 1. Spending 2. Tax policies 3. Whether the economy (as measured in GDP) is growing or contracting

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10 Federal spending, federal debt, and GDP (averages) Fiscal Year Federal spending Federal debt Gross Domestic Product Democratic + 9.9% +4.2% +12.6% Presidents Republican % +36.4% +10.7% Presidents

11 The “Perfect Storm” of Budget Disaster Second-to-last G.W. Bush budget FY 2008: $459 billion deficit (3.2% of GDP) Last G.W. Bush budget modified by Obama FY 2009: $1.17 trillion deficit (10% of GDP) First Obama budget FY 2010: $1.3 trillion deficit (about 9% of GDP)

12 Components of the Budget: Expenditures 1.Trust fund entitlements The main trust funds are Social Security and Medicare. Some others are FUTA and the Highway Trust. 2.Interest on the national debt 3.Appropriated entitlements These programs also mandate payment of benefits to any person meeting eligibility requirements. Congress does set the eligibility requirements and fund these programs, but not annually. Usually they are funded every five years. Such programs include Medicaid, Food Stamps, and Head Start. 4.Discretionary programs Annually appropriated programs. Military spending is by far the largest.

13 FY 2008 Spending Budget: $2.983 trillion as usually presented (chart numbers in billion $)

14 FY 2008 Spending Budget: $1.732 trillion without trust funds and interest on debt (chart numbers in billion $)

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16 Choices for Jackson County, Oregon In FY 2012, taxpayers here will pay $210.3 million for proposed Department of Defense spending. For that much money, the following could be provided: 110,202 Children Receiving Low-Income Healthcare for One Year, OR 3,330 Elementary School Teachers for One Year, OR 37,910 Head Start Slots for Children for One Year, OR 28,299 Scholarships for University Students for One Year, OR 113,854 Households with Renewable Electricity-Wind Power for One Year, OR 3,040 Police or Sheriff's Patrol Officers for One Year

17 Starving the Budget The federal government collected less in taxes in 2010 than it has in over three generations, and tax rates are at historic lows.

18 Taxes on Corporate Income Corporate income taxes totaled about 1% of GDP this year, 60% lower than 40 years ago. While the official corporate tax rate is 35%, one of the highest in the world, the effective corporate tax rate averages 18%. Using various loopholes and off-shore tax havens, some of the largest U.S. corporations pay little or no taxes whatsoever.

19 Exploiting the Loopholes 1.In 2005, one in four large United States corporations paid no taxes on revenue of $1.1 trillion, Government Accountability Office 2008 report 2.In 2010, General Electric paid no U.S. taxes despite global pre-tax income of more than $14 billion, $5.1 billion earned in the U.S. No taxes in 2009 either, but $3 billion in tax credits for the two years. 3.In 2010 Exxon Mobil reported a record $45.2 billion profit. It paid no taxes in the U.S., thanks to 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter its overseas cash flow. record $45.2 billion profit

20 TAXATION OF HIGHEST INCOME BRACKET HISTORICAL VIEW

21 Taxation of Capital Gains Year PresidentMaximum tax rate 1979 Carter28% 1982 Reagan20% 1996 Clinton29% 2006 G.W. Bush15.70%

22 The Bush tax cuts added $1.7 trillion to the nation's debt over

23 2010 Shares of the Bush Tax Cuts The richest 1% of families got an average tax cut of $92,000, including cuts in income and estate taxes. That represented 53% of the total reductions. Next 4% richest: 6.6 % of the total reductions. Next 15% richest: 12.1% of the total reductions. Everyone else (80% of American taxpayers): 28% of the total reductions.

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25 Third Contention Revisited We won’t successfully solve our problem unless we recognize the underlying force driving all phases of our economy and politics: the large and rapidly growing divide in wealth and political power between the richest 10% and all the rest of us. 25

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27 Widening inequality of wealth

28 The real choice we face: democracy or oligarchy “Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important.” — Joseph Stieglitz

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