Can You Balance the Federal
Budget?
Grab a worksheet, see what you can do,
and maybe go to Washington, D.C.
2011 “Facts”
• The 2011 Federal Budget Deficit will be about
$1645 Billion.
• Total Federal Taxes will be only $2174 Billion.
• Total Federal Spending will be $3819 Billion.
• $3819 - $2174 = $1645 Billion increase in the
National Debt
Trends in Federal Taxes
• Individual income tax collections as a share of
total national income have been declining over
time
• Corporate income tax collections have been fairly
stable over time
• Payroll taxes have also remained stable over time
• Total Federal taxes, as a share of total national
income, are now at their lowest point in 30 years
Federal Taxes as % of Gross National Income
20.0
18.0
% of Gross National Income
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Individual Income Taxes
Corporation Income Taxes
Payroll Taxes
Taxes, Spending & Deficits
• Even though tax rates have declined, strong
income growth has made the total $ collected
in Federal taxes rise nearly every year
• Federal spending has grown much faster than
tax revenues, resulting in large budget deficits
nearly every year since the early 1980s
• The current “Great Recession” has depressed
taxes and increased spending, dramatically
increasing the Budget Deficit to $1645 Billion
Federal Taxes, Spending and Budget Surplus/Deficit
4,500
500
4,000
Federal Taxes and Spending ($Billions)
3,000
-500
2,500
2,000
-1,000
1,500
1,000
-1,500
500
0
-2,000
Total Taxes
Total Spending
Surplus/Deficit
Balanced Budget
Budget Surplus or Deficit ($Billions)
0
3,500
What’s the Cure?
To reduce or eliminate the budget deficit
• Spending must be decreased and/or Taxes must
be increased
• Top 5 spending items are 70% of total spending:
Defense, Social Security, Medicare, National Debt
Interest and Medicaid.
• Debt Interest cannot be cut. Total spending
outside of top 5 items is < $1645 Billion.
• Grab a worksheet and see if you can find $1645
Billion in spending cuts to balance the budget
Federal Spending in Billions of Dollars
Defense
Social Security
Medicare
Interest on National Debt
Medicaid
Other Public Assistance
Unemployment Insurance
Federal employee retirement
Food & Nutrition Assistance
Transportation
Elementary, Secondary & Voc.Ed.
Income Security for Veterans
Housing Assistance
Federal Law Enforcement &
Justice
International Affairs
Veterans Medical Care
Natural Resources & Environment
Science, Space & Tech
General Govt Administration
Energy
Development & Disaster Relief
Agriculture
Social Services
Post Office and Housing Credit
Veterans Ed & Training
2001
305
433
217
359
152
88
30
81
34
54
23
22
30
2011
768
748
494
430
347
177
135
127
107
95
78
73
69
30
16
21
26
20
14
0
12
26
13
6
1
61
55
50
49
33
32
28
26
25
21
17
11
Your 2012 Cuts
??
2001-11Change
463
315
277
71
195
88
105
46
73
40
55
50
39
30
39
29
23
14
18
28
14
-1
7
12
9
Total:
1645 Billion ???
Need for New Taxes?
• If spending can’t be cut by $1645 Billion, then
taxes must be increased to decrease the
Budget Deficit
• Personal income taxes comprise about half of
total taxes, corporate income taxes comprise
15% and payroll taxes the rest.
• Who’s paying the income tax and how much?
IRS Federal Personal Income Tax Data, 2008
Income
Adjusted Gross
Bracket
Income Range
Top 1%
25-50%
> $380,354
$159,619 $380,354
$113,799 $159,618
$67,280 $113,798
$33,049 $67,279
Bottom 50%
< $33,048
1-5%
5-10%
10-25%
Average
Average Share of
Total
Income Tax Rate Income
Share of
Total Taxes
$1,204,247 23.27% 20.00%
38.02%
$221,710 17.21% 14.73%
20.70%
$132,860 12.44% 11.03%
11.22%
$86,773
9.29%
21.62%
16.40%
$47,840
6.75%
19.86%
10.96%
$15,355
2.59%
12.75%
2.70%
• The richest 5% of taxpayers pay nearly 60% of all income
taxes, while earning 35% of all income.
• Average tax rates are 23% for the top 1%, 17% for the next
richest 4%, and then fall below 13% for everybody else.
The 12/17/10 Tax Agreement Decreased
Taxes $505B in 2011 and $385B in 2012
• Extension of GW Bush income tax cuts
– $40 Billion for preserving lower capital gains,
dividends and maximum income tax rates
– $70 Billion for taxpayers subject to Alternative
Minimum Tax (> $175,000 income taxpayers)
– $35 Billion for increasing the Estate Tax Exemption
from $1 to $5 million and decreasing the rate to 35%
– $120 Billion for Middle Income taxpayers
• $120 Billion for Payroll tax cut of 2% (only 2011)
• $120 Billion for extra Business tax credits
Possible Options in 2012?
• In 2012, the 2% decrease in the payroll tax will
expire, so payroll tax collections will increase
$120 Billion
• Each 1% drop in unemployment reduces the
Budget Deficit by $100 Billion (less $ for
unemployment and more taxes paid on
incomes and profits
• Best deficit scenario under present policies if
economy rebounds: $1325 Billion in 2012
What’s Should Washington Do?
• Most Economists believe that Budget Deficit
levels should be compared to National Income
levels.
– The 2011 deficit is about 10% of Total US income
which is not sustainable. Think Greece & Ireland
– Decreasing the 2012 deficit from $1325 to $700 Billion
would bring it to about 3% (also a Euro-zone target) of
total income, which would balance the National Debt
and Total National Income levels
• Problem: raising taxes or reducing government
spending could keep unemployment high
• Will it be possible for D.C. politicians to either cut
spending and/or raise taxes by $625 Billion per
year if they want to be re-elected?
• Large programs like Defense, Social Security,
Medicare and Medicaid are where the money is.
A 5% cut to them reduces spending by $120
Billion (=25% of needed cuts).
• Watch for disguised tax hikes and spending cuts,
e.g.:
– Tax simplification that limits deductions for state
taxes, mortgage interest, medical deductions, etc.
– Smaller inflation adjustments for Social Security,
Medicare, Defense, etc.
Thank you for your interest.
Department of Economics
Iona College