Note: Although I try to keep GRS a politics-free zone, today’s topic is inherently political. I’ve stayed as neutral as possible in the article, but I know that there’ll be some political discussion in the comments. Please keep conversation civil, as always.
Recently at The Simple Dollar, Trent posed the question, “How much do taxes matter to you?” As might be expected, his readers responded with passionate comments from both sides of the political spectrum. The discussion frustrated me, though. There’s just too much misinformation, and people offer their opinions as if they were facts.
I’m as guilty as anyone else.
Because my own education on this subject is weak, and because I want GRS readers to be informed, I spent twelve hours last week researching a variety of tax topics. From this research, I’ve written two articles: this one about the U.S. budget, and a second part about taxes, which I’ll publish next week.
These posts are meant simply to be educational. There’s no takeaway other than knowledge. We cannot have informed discussions about taxes and government spending if we don’t have the baseline information. These two articles record my attempts to discover that baseline information.
To begin our discussion of taxes, let’s examine the state of the U.S. budget.
The U.S. Budget
The U.S. budget is complex, and it’s the source of much political debate. Some argue that we should cut our military spending and use the money to fund a national health care system. Others argue that nationalized health care is the road to socialism, and that we should reduce our current government health programs. Others simply want to cut all government spending. But how much is actually spent where?
The U.S. Office of Management and Budget (OMB) provides a website devoted to the budget of the United States government. You can download the entire budget in PDF form (~2mb file), or browse only for the sections that interest you. There are a variety of supplementary materials available, too.
All of this information is overwhelming. To make the numbers easier to understand, Jess Bachman produces an annual Death and Taxes poster, which attempts to visualize the entirety of the federal budget. The poster contains over 500 programs and departments. The size of each item on the poster is proportional its budgeted amount.
The Death and Taxes page allows you to zoom around and look at sections of the poster from within your web browser. There’s even a “quick find” feature that allows users to look up the sections that interest them.
From the “Death and Taxes” poster, here’s a glimpse of the total U.S. national budget:
Although this says “2008 federal budget”, it’s actually for 2010.
Even though this image simplifies things, it still took me a couple of minutes to understand it. The penny in the middle represents receipts — from taxes and other sources. The big black chunk missing from the penny is the budget deficit. The government has to borrow this money to stay afloat. The colored circles around the outside edge represent where the government is spending money. Again, the area of each circle is proportional to the expense. (I have no idea why the equation [Outlays = Receipts + Deficit] doesn’t balance. Can someone explain?)
Looking over the budget, here are some datapoints that interested me:
- The Department of Defense has a budget of $534 Billion, which is 37.5% of the overall $1421 Billion discretionary budget. (What does “discretionary budget” mean? See the next section of this article.)
- I’ve always thought the Department of Homeland Security was a sort of boondoggle. Looking at its $41.383 Billion budget, however, I see that it was basically created by shuffling agencies from other departments. Customs and the Coast Guard are a part of Homeland Security now, for example.
- The Department of the Interior, which is home to programs like the National Park Service, etc., has a budget of only $12.007 Billion. That seems really low compared to some other parts of the budget.
- NASA’s budget seems low, too. Is $18.686 Billion per year really going to provide a manned mission to Mars in my lifetime? We’ll need to raise that budget if this geek is going to have a chance of dying happy. (I can dream, can’t I?)
- The United States Postal Service has outlays of $78 Billion, most of which are covered by fees. About 5% ($3.776 Billion) of the agency’s budget comes from tax dollars. This is much less than I would have guessed.
- The Department of Education has a $46.69 Billion budget. Of this, $29.64 Billion (63.4%) is for Special Education and Education for the Disadvantaged.
- The Financial Literacy and Education Commission (which falls under the auspices of the U.S. Treasury) is far, far too small to be listed here.
If looking at the budget poster online is overwhelming, you can scan the spending on various departments in this data-only list of budget spending (it’s just a blog post, so it’s not too daunting).
As someone who has served on a small-town budget committee, I guarantee you that each of these government organizations — both the ones you support and the ones you don’t — can provide rationalization for every penny they receive. In fact, they probably wish they had more money to work with.
But as a taxpayer, I wish I had more money to work with, too.
There’s a balance to be found here. And it’s arguments over this balance that create divisions among our political parties and lead to tirades about taxes.
Discretionary Spending
You may have noticed that the U.S. budget is divided into discretionary spending and non-discretionary spending. What’s the difference? In my personal budget, non-discretionary spending (or mandatory spending) includes things like the mortgage and utilities and essential food. Discretionary spending includes videogames and comic books and restaurant meals. But what does it mean for the government?
- Mandatory spending (or “direct spending”) is required by law. Social Security, Medicare, Medicaid, and other federal programs (such as Unemployment Compensation, Food Stamps, Student Loans, etc.) are mandated by law. Our elected officials must change the laws before they can change spending on these items. These programs are sometimes referred to as “entitlements”. If you meet the requirements for a particular program, you’re entitled to receive benefits.
- Each year, as a part of the budgeting process, the President and Congress negotiate discretionary spending. Whereas entitlement programs are ongoing, most discretionary expenses require annual renewal. Requests for discretionary spending are made via an annual appropriation bill, which authorizes the government to spend money. Discretionary spending covers programs like the U.S. Forest Service, the Department of Agriculture, the Food and Drug Administration, the Peace Corps — and the military.
Using data from the Congressional Budget Office, I was able to create a graph that shows that discretionary spending as a percentage of the U.S. GDP (gross domestic product) peaked in 1982, and then fell under Presidents Reagan, Bush, and Clinton. It jumped under President George W. Bush:
The Congressional Budget Office data breaks discretionary spending down further. In this chart, I’ve retained the mandatory spending line, but split discretionary spending into three categories: defense spending, domestic spending, and international spending. Again, these numbers are graphed as a percentage of GDP:
Both defense and domestic spending increased under President Bush. I suspect they’ll both increase under President Obama, as well. How much of this is due to each man’s political philosophy? How much is due to the political and economic exigencies of their time? I don’t know.
“That’s great,” my wife said when I showed her these charts. “But what about total spending. You need a chart for that.” Right. Here’s some info about all government spending (including state, local, and federal). What we want, though, is this data from the U.S. Office of Management and Budget.
Here are total U.S. government budget outlays as a percentage of GDP over the past 80 years:
To me, it looks like President Clinton is the only one to systematically reduce spending.
But as several commenters have noted, there are other factors to the 1990s reduction.
Despite fiery rhetoric from both sides, no one political party can honestly claim to be anti-spending. I think that most of us understand that some government spending is necessary — we just worry about the degree of spending that occurs.
It’s a fine thing that citizens want to keep government spending in check, but it’s important to note that just because you don’t want or need a program doesn’t mean that there aren’t other citizens who want or need it. (I was raised in a “peace church”, for example, and so am naturally opposed to military spending. Yet I recognize that for most U.S. citizens, this is a high priority. I’ve learned to temper my upbringing with the knowledge that mine is not the majority opinion.)
Although this is a long article, it provides only a cursory glimpse of the U.S. budget. It doesn’t even begin to touch the subject of where this money comes from! Tune in next week for the second half of my research, in which I try to uncover the truth about taxes.
Postscript: Here’s a new New York Times editorial from Warren Buffett, in which he writes that recent deficit spending was justified to save the economy, but cautions that government needs to be prepared to pull back on spending or risk making things even worse. In order to ward off inflation, Buffett says, “Once recovery is gained…Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.”
Update #1: Several people have requested info about the relationship between national debt and GDP. In the comments, Joshua points to this national debt graph. He also suggests cross-referencing these graphs with info on party divisions of the U.S. Congress.
Update #2: I amended my Bill Clinton statement. As several commenters have noted, there are other factors to the spending decline during the 1990s, including an expanding economy and a Republican-controlled legislative branch. Also, Ginger-Kathleen sent e-mail asking about government salaries. The President makes $400,000 per year and has a huge expense account. Members of both houses receive $174,000 per year.
Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster. Bachman is generously offering a deal for GRS readers. Order two or more posters and get 50% off when you use the code ‘slowly’ at checkout. “It’s basically buy-one, get-one-free,” Bachman says. Thanks, Jess!
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This article is about Economics, Taxes
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“How is it NOT a “zero-sum game”
Because benefitscosts. They are different things. For both the rich and the poor, if you took away the benefits people get from paying taxes along with the taxes, they would end up poorer. And wealthy individuals would lose a lot more than the poor or middle class people would just because they have more to lose.
If you put a fence along a property line owners on both sides benefit. But if one needs a fence to keep in livestock or keep out predators and the other has no need for a fence the benefits are not the same. There are some wealthy people that seem to want everyone pay equally to maintain the fence, even though they are the ones getting most of the benefits from it.
It is hard for me to understand how anyone can deny that the wealthy are taking more benefits out of the society we create than the rest of us. I can understand the argument that they “deserve” what they get, but not that they aren’t getting greater benefits.
Take away public education and most businesses would fail for lack of an educated workforce. Take away the criminal justice system and people who were able to accumulate wealth would find their persons, businesses and wealth all at greater risk. Take away the ability to incorporate and people would have to put their full wealth at risk to buy part of a business. Our government is largely organized to help people accumulate wealth. There is no reason those people who are successful shouldn’t pay the lion’s share of the costs.
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Ross, there is a lot more to government benefits than “fences.”
The lion’s share of government spending goes to Social Security and Medicare/Medicaid, both of which disproportionately benefit POOR people, not rich people. Add in national defense, and suddenly all those high school dropouts with not career prospects have 4 years of guaranteed employment, followed by a free ride through college.
Who’s paying for all this? The “rich.”
Rich people don’t need an educated workforce. They just need consumers with credit. They can teach someone with a 75 IQ to screw a bolt onto a car chassis. Heck, they’ve done exactly that, a thousand times over already.
But to go back to your fence example. Say it costs $100 to put up that fence. The government has decreed that a fence must be built, so they show up at each neighbor’s door and demand $75 from each. There is no option to decline. If you refuse, you go to jail. So the government collects $150, then builds the fence for $100, with the other $50 going to pay the salary of the fellow who came to your door and collected the money in the first place.
If, on the other hand, the neighbors themselves got together and decided they wanted a fence, they could’ve had it for just $50 each instead of $75 each, because the government would’ve had had their greedy, inefficient little paws in the middle of the transaction.
Finally, in the case of your farmer who needs the fence but can’t afford it himself, where do you think the money to build it comes from? Poor people? Ha! Surely you know that poor people don’t pay any taxes at all. In this case, the farmer is still shouldering the cost of the fence (plus a little overhead for government bureaucracy). It’s merely spread around all the other farmers (who all also need fences built). Thus perpetuating the illusion that they’re getting more than they paid for, when really, they’re not.
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“The lion’s share of government spending goes to Social Security and Medicare/Medicaid, both of which disproportionately benefit POOR people, not rich people.”
Neither of those are true. POOR people get very little of the benefits from either of those programs and together they don’t make up the “lion’s share” of government spending. Moreover, Social Security is paid for from a fixed rate of taxes on the first $100,000 of earnings and people receive benefits in proportion to the amount they pay.
“Rich people don’t need an educated workforce”
Most successful business people would disagree with you.
“If, on the other hand, the neighbors themselves got together and decided they wanted a fence, they could’ve had it for just $50 each instead of $75 each,”
On the other hand, the one with livestock might refuse to pay anything, hoping that eventually his neighbor would tire of shooing livestock off his property and pay the whole cost of the fence.
“Surely you know that poor people don’t pay any taxes at all.”
Surely, you know that is not true.
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“The lion’s share of government spending goes to Social Security and Medicare/Medicaid, both of which disproportionately benefit POOR people, not rich people.”
Neither of those are true. POOR people get very little of the benefits from either of those programs and together they don’t make up the “lion’s share” of government spending. Moreover, Social Security is paid for from a fixed rate of taxes on the first $100,000 of earnings and people receive benefits in proportion to the amount they pay.
“Rich people don’t need an educated workforce”
Most successful business people would disagree with you.
“If, on the other hand, the neighbors themselves got together and decided they wanted a fence, they could’ve had it for just $50 each instead of $75 each,”
On the other hand, the one with livestock might refuse to pay anything, hoping that eventually his neighbor would tire of shooing livestock off his property and pay the whole cost of the fence.
“Surely you know that poor people don’t pay any taxes at all.”
Surely, you know that is not true. Anyone who works for a wage, at minimum, pays social security and medicare taxes.
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“The lion’s share of government spending goes to Social Security and Medicare/Medicaid, both of which disproportionately benefit POOR people”
“Ha! Surely you know that poor people don’t pay any taxes at all”
I hope the latter comment is a joke. Even if someone’s Federal Income Taxes are 0 (or less if they get a credit), people everywhere pay Medicare, Social Security, and, depending on their location, state and local income taxes, sales taxes, etc. These taxes can be quite regressive – sales is inherently so, and Virginia’s (where I live) top bracket starts at something like $18,000 a year.
And poor people pay disproportinately more social security taxes since there is a cap on income that is taxed for social security (~$100K). I don’t see how the poor benefit disproportionately from Medicare, since it is open to anyone 65+. Medicaid is much (33%) smaller.
I don’t understand the anger expressed by some in these comments. Tax rates have not gone up. If you are in the top income tax bracket, your marginal tax rate is still 35%. If the Bush tax cuts expire, as they are set to in 2011, the rate will increase to 38.6% – nowhere near the 50% it was as recent as 1980. Before any ad hominem attacks start, my family owns a small business. Like everyone, of course we’d like to have more, but we recognize that we have more material wealth than 99% of people on this earth and are thankful for it.
The irony, when discussing federal spending related to voting is that deficit spending – i.e. much of the current spending – is, on the whole, coming from other countries. If you want to take away the poor’s vote here, you would, by that logic, have to give it to the Chinese.
Thanks for the fair and thorough article J.D.
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JD – thank you so much for this very interesting article. Just as it is important to take the emotions out of our personal money management, it helps to take the emotions out of this discussion. I am grateful to you for tackling such a complex subject.
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Now yes, those people getting paid from it also paid into it themselves. No disputing that. But see, there was this entire generation, most of whom are dead now, who got far, far more out of it than they paid into it. My grandparents, long deceased, got back everything they had paid into it within one year, then continued to draw a check for twenty-five more years. It was easy to carry this out on a large scale back then, because the baby boomers were younger and working, and there are a lot of baby boomers. You could basically fund all the oldsters’ 25-year retirements on the taxpayers’ dime (at least from a cash perspective), because there were so many more people paying into the system than taking out of it, and also because the government has never recognized that it has a liability to pay anyone back for the money they’ve paid into it.
A similar scenario would be if you put all your bills on a credit card, only paid the minimum balance on the credit card, and then called it a surplus because you had your whole paycheck left over, sitting in your checking account. Our government does not consider that credit card balance to be a debt, and you don’t see the unfunded SSI and Medicare entitlements included anywhere in our current national debt figure. I would say it doesn’t consider it to be a debt because it has no plans to pay any of it back when the money runs out. If the government included the unfunded liabilities of SSI, Medicare, and the prescription drug program into the national debt number, it would jump from $13 trillion to about $60 trillion. This just boggles your mind because the numbers are too big, but it comes down to over $700,000 per household. (Per the Doug Casey report.)
In other words, all you boomers out there who think the government owes you Social Security payments because you paid into it – sorry, but the government doesn’t see it that way, and your money is already gone. Some of it went to your parents and grandparents, who made out like bandits on the program. What was left over was not kept in a separate fund – it paid for things like the Iraq war and a whole slew of other projects over the years.
Ross Williams compares SSI to insurance, as opposed to a pyramid scheme – and that might have been a valid comparison back when the program was first started. The average lifespan back then was 62 for a man and 63 for a woman. The SSI benefit age was set to 65, so the majority of people were never going to live long enough to receive it, nor did they expect to, and that’s why they paid so little into it to begin with. It really was more like insurance – “old age insurance,” if you will, in case you should be, er, unfortunate enough to live to be 90 and thus outlive your savings and ability to work. The problem with making something like this a government program is that it becomes a political issue. It would be nice if they had written into the original legislation that the payout age would be adjusted based on actuarial tables every year, the way premiums for life insurance are determined. But that age was set at 65, and no politician has ever wanted to commit career suicide by suggesting that the age should be raised as lifespans increased. So now the majority of people get SSI, because they live longer, which just compounds the problem. In the year 2016, for the first time, the amount of money being paid out in SSI and Medicare benefits will be larger than the amount being collected in taxes for them.
This comment, though: “You can also look at it as a way for the next generation to pay for all the public infrastructure they inherit that was created by the hard work of people who retire.” Um, no. We might just be quibbling over a matter of degree, here, but the amount of debt that is being shoved onto future generations is utterly staggering and crushing. It’s one thing to pass along a few million in debt because hey, we built the interstate highways and since you get to enjoy them you can help pay back some of the money we had to borrrow to build them. But this current level of debt and unfunded liabilities goes way, way beyond any benefit from current infrastructure. Future generations are going to be so burdened by just the interest on this debt, they are never going to have anything left over to build infrastructure of their own. And let’s face it, most of the money the government has spent in racking up this debt has just been wasteful and ridiculous, and far beyond the scope of what the government should have been meddling in to begin with. Only a small portion can reasonably be called “infrastructure.” Do you really think future generations are going to thank us for Cash for Clunkers? I predict that they will hate 1) the government, and 2) their elders, in that order.
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Bear (#68) –
Most of those taxes you are seeing are for personal income that you are taking out of your business.
If your business makes a high net profit but all of that money gets re-invested back into the business, you wouldn’t be paying personal income taxes on it would you?
Just pointing that out because I think the “If I was taxed less I would create more jobs!!” argument to be quite the straw man (at least in some cases).
Just look at all of the Fortune 500 companies that pay little to no taxes!
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“If your business makes a high net profit but all of that money gets re-invested back into the business, you wouldn’t be paying personal income taxes on it would you?”
You would pay taxes if you are operating as an S-Corp where profits pass through to the owner’s income taxes. But that is really irrelevant. You don’t hire people because you can afford to, you hire people because they will produce more than you pay them.
Of course to make someone productive, you may have to invest in a variety of tools and training. There is no doubt that private investments in productivity help create wealth and jobs, but so do investments by government.
“But this current level of debt and unfunded liabilities goes way, way beyond any benefit from current infrastructure. ”
No it doesn’t. Just take a look at the current cost of a new federal highway system. But that is the least of the what the next generation will inherit. Every factory, every house, every building and all the developed cropland – the list goes on and on. In essence the net worth of everything that currently exists was either created by the current generation or inherited from previous generations.
If you look at the percentage of debt/gdp you will notice it was far higher during World War II. That was a “crushing debt” that got paid off by sending people to college on the GI bill and creating a generation that was vastly more productive than its parents. Likewise, most boomers are better off than their parents.
The cost of Social Security is really a trivial issue. The big picture is that this generation is not investing in making the next generation more productive than we are. And that is largely a question of too little spending on investments in public infrastructure, education etc, rather than too much government spending. “Investments” in McMansions, vacation homes, boats, fancy cars etc do not make people more productive.
Just to be clear – the notion that Social Security will run out of money is nonsense. Even once the entire trust fund is depleted, the SSI taxes by current workers will cover 75% of the promised benefits. And does anyone seriously think that we will end all payments of Social Security from general tax revenues just because we reach a magic point where those payments have equaled the excess Social Security taxes we are paying now?
The real Social Security crisis has already started. How do we replace the declining surplus from Social Security that we have been spending? That will slowly transition to paying it back and then to borrowing money to pay Social Security benefits. The political struggle over how to share those costs is going to continue until we are all dead.
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“If you look at the percentage of debt/gdp you will notice it was far higher during World War II.”
Americans back then bought war bonds – now the debt is held by foreign countries.
“Even once the entire trust fund is depleted, the SSI taxes by current workers will cover 75% of the promised benefits.”
You aren’t taking into consideration that the government has already been spending the surplus taxes that have been paid in the past. Now it not only won’t have those taxes to spend, it will have to start spending some OTHER taxes to make up that 25% you mention. Yes, it will be staggering. The government will either have to cut spending to the extent that people will feel it, or it will have to borrow more. In that case, interest on the debt will take up so much of the annual budget that we will be in an utterly stagnant situation.
“The political struggle over how to share those costs is going to continue until we are all dead.”
And you consider this to be a trivial issue?
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“In essence the net worth of everything that currently exists was either created by the current generation or inherited from previous generations.”
Would you think it was okay to leave thousands of dollars in debt to your kids, since it was your upper middleclass lifestyle that enabled them to go to college and build decent lives of their own? That seems to be the moral equivalent of what you are saying here.
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Ross –
That’s true. But then it falls into distributive income.
If you pay yourself a salary of $40,000, that will all be taxed the medicare portion of the FICA(2.9%) and social security portion of the FICA (12.4%). Plus all of the other normal taxes on income.
Any net income leftover in your business is then accounted for as distributive income, which passes through to its shareholders according to how much ownership they have in the business. Doing so avoids that extra 15.3% in FICA taxes. And then obviously, as a S-corp, one of the benefits is no corporate tax.
In the end, a lot of this depends on YOUR circumstance. But as they say, “the grass is always greener.”
MLR
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@Pirate Jo (#111)
I get what you are saying, but comparing government finance and personal finance is disingenuous. They don’t work the same and that is one thing we have to consider when economic decisions are made.
For example, look at how many people have no clue about the effects of monetary policy… but are the first ones to rage against the monetary policy of our country.
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I highly recommend Alan Greenspan’s book “The Age of Turbulence.” It offers insight into government spending and actions taken by the Presidents he’s seen through the years (he has worked with four presidents during his time as Fed Chair). It’s really interesting.
I truly believe Clinton did make reducing the government deficit a priority. However it is also true that he was only able to do so because the economy was doing so well. If he tightened the purse strings while the economy was faltering, he would not have been reelected.
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” … comparing government finance and personal finance is disingenuous.”
I call B.S.
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I think that any discussion of taxes and the federal budget requires some perspective. Our current federal tax rates are historically low. Currently, the lowest federal tax rate is 10% and the highest marginal rate is 35% (we have six brackets). Throughout the history of the federal income tax, rates have been increased during national crises (generally during wartime) and decreased when the funds were no longer required.
In 1918, during World War I, the first bracket was raised to 6% (from 1% in 1916 and 2% in 1917) and the highest marginal rate was increased to 77% (from 15% in 1916 and 67% in 1917). After WWI, rates gradually declined until the first bracket was at 0.375% and the highest rate was 24%.
Rates were increased again during the great depression with a first bracket at 4% and the highest marginal rate at 63%. As we entered WWII, rates were increased further and in 1944, the lowest rate and highest marginal rate peaked at 24% and 94%, respectively.
Tax rates were decreased after WWII, but were increased again during our involvement in the Korean War. After Korea, rates declined. Then, during the Vietnam War, rates were increased.
During all of the 1970s, the lowest and highest tax brackets were stable at 14% and 70%, respectively. During the 1980s, the lowest rate was adjusted from 14% to 12% to 11% and finally to 15% in 1988. The highest marginal rate was adjusted from 70% to 50% to 38.5% and finally to 28% in 1988. This change was a huge windfall for high income earners and was actually regressive. Note that the lowest tax rate actually increased while the highest marginal rate was decreased. Also, the number of brackets was reduced from 14 in the 1970s to 3 brackets in 1988.
In 1991, the highest rate was increased to 31% (Gulf War?). In 1993, the highest rate was increased again to 39.6% by adding two additional brackets at the top (to balance the budget).
Starting in 2002, a 10% bracket was added to the bottom to get to the current 6 tax brackets and the top rate was reduced to its current 35% in 2003. This is the first time in US history (from my review) that the top marginal bracket was actually decreased at the start of a war (Iraq and Afghanistan). The combination of lowered revenue and increased spending for the wars resulted in rising deficits. And, the current economic crisis added to the deficit due to decreased revenue and the government stimulus.
So, our current tax rates are low versus the highest in our history and are certainly low during a time of war. What concerns me at this time is the apparent unwillingness of our citizens to support higher taxes in order to pay for our current military and economic challenges. This wasn’t always the case. I fear that the spirit of shared sacrifice that we saw during previous crises no longer exists.
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One of the best (and most alarming) simple websites that show you the federal budget as a pie chart is this one:
http://www.truemajority.org/csba/priorities.php
(Warning – the website is True Majority, which is headed by one of the Ben and Jerry’s founders, so it’s biased towards the left. Still, I find the information very useful.)
One of the things I find absolutely stunning is the amount we spend on military spending versus other countries. Clearly we could reduce our spending and still be perfectly safe.
And the humorous version, on the Colbert report. http://www.truemajority.org/colbert/video.php, and http://www.truemajority.org/oreos/ – an animation.
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@Ed (#116) (and everyone else)
Ed, you’ve just effectively anticipated one of the sections of next Monday’s post. Originally I had this post and that post melded together as one, but split them for the sake of sanity. I’m torn about all of the tax discussion going on here because I don’t want you all to get it out of your systems before Monday. I want you to discuss a lot of this then!
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Just one comment. It is not the president that puts together the budget but Congress. The reason that spending went down “under Clinton” was actually because in ’94 Republicans took over both houses and cut taxes, cut spending, etc.
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Pirate Jo –
Call B.S. all you want, doesn’t make you correct.
If you had/have an education in politics and economics you would/should understand how different personal finance and government/public finance are.
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Pirate Jo:
I agree with MLR. Government finances are completely different from personal finances. I made this point in the forums earlier this month. Quoting myself:
“The truth is, the ‘normal’ finance rules that apply to people don’t apply to governments at all. The two entities exist with completely different sets of limitations and parameters. A person has to save for retirement. Governments never retire. A person can lose their job. Governments can never lose their income. A person can’t control their salary. Governments are free to set the tax levels at whatever they want. A person has to plan to make their money last until they die. Governments never die, so they have an infinite stream of incoming cash, and an infinite outgoing stream of payouts.
“The two situations are so completely different that any comparison at all is bound to be flawed. Thus, saying governments should run their finances like people is like saying people should run their finances like the government. That is, if you don’t make enough money, just raise your salary. Forget about saving for retirement, because you’ll never retire. If your budget is tight, make the banks lend you money at a lower interest rate. And other such nonsense.”
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Ed,
Thank you for the excellent summary. I think one aspect you are missing are all of the other taxes that we must pay now. What about payroll taxes, ridiculously high property taxes, sales taxes, estate taxes, etc. I think the overall burden is excessive, and until our government becomes significantly more efficient, and learns to tighten its belt just like the rest of us have had to, I am not in favor of supporting their spending addiction.
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Just checking back, but glad to see the comments popped out of their earlier insanity of thinking it would be a good idea to give people with more money more voting power.
Stay-at-home moms make no income, but if their husbands make enough for both maybe the husband should get two votes? Or maybe a vote and 3/5ths.
In early american society (except for maybe rhode island) the right to participate in our democracy could and was tied to how much property they owned. That presents several problems. Nowadays we mostly have non-wealthy people entering the military and fighting our wars. I can’t imagine the members of our military being all the excited to fight and die in wars that only the rich have voted for.
But I guess you could have the rich and military personnel be the only ones with the right to vote. In some other nations the military is a class above the common citizenry as well. That’s very helpful in putting down the common people when they feel like a little rebellion.
And if only moneyed individuals had the power to vote (and likely they would choose to exercise it in their own financial interests, thus forcing class stratification) then there *would* be rebellion. The whole course of freeing up US voting restrictions, if you read Howard Zinn (required in a lot of US history classes as a counterpoint to “traditional” narratives) was to keep a lid on simmering class tensions.
One person, one vote may have its flaws in terms of making it difficult to settle hard decisions due to perverse incentives, but there is little else better. The other roads lead to social instability and/or fascism.
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“So, our current tax rates are low versus the highest in our history and are certainly low during a time of war. What concerns me at this time is the apparent unwillingness of our citizens to support higher taxes in order to pay for our current military and economic challenges. This wasn’t always the case. I fear that the spirit of shared sacrifice that we saw during previous crises no longer exists.”
Maybe we need Donald Duck to help convince us to support taxes like they did in the 40′s: http://www.youtube.com/watch?v=gJ69X1qt4sQ
Perhaps Homer Simpson could star in the modern versions.
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Huh. The comments to this post consist almost entirely of conservatives wailing about the onerous burden of the evil taxes. Who’d-a thunk it?
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You have to be careful about politicizing the debt too much. That’s what we did in Alberta and now we’re paying the price of the “infrastructure deficit” our anti-debt politicians built up – many things the government needed to do that they didn’t do in order to cut spending.
Governments need to spend money on the basics of making the economy work, both physical and social infrastructure. Government debt also plays a vital role in stabilizing the economy (there’s a reason that before deficit spending became normal, the industrialized world was routinely rocked by economic shocks).
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I also was appalled by the discussion in the comments that the right to vote should somehow be tied to income. That would be a step back in time that would frighten me.
I have to say that twice now I’ve been disturbed by comments on here (not ones from J.D., though) – first the obvious disdain for the poor in the post last week and now this one on taxes. Has the readership of GRS changed, or have I not been reading the comments closely in the past?
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Hey, Jane. I don’t think the readership has changed. There have always been people of all political persuasions here. In some threads, the liberal folks dominate. In others, the conservative folks dominate. I’m fine with that. All I ask is that people be polite to each other and argue issues on their merits.
Does that make sense?
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I really appreciated this article, J.D. I was also interested in the commentary, especially Pirate Jo’s point about the change in life expectancy since social security was enacted in the 1930′s.
I would be interested to know what the effect on our budget would be of changing the social security retirement age and Medicare eligibilty ages from 65 to 70 to reflect current life expectancy? Would this change solve a lot of our budget problems?
I understand that this change would probably be politically impossible now. But I am 63, healthy, and intend to keep working until I am 70 at least. I think Baby Boomers like me ought to be willing to make some sacrifices to get us out of this mess.
People who are older and unable to work ought to be cared for with access to health care and disability income if they do not have insurance or savings to provide for these problems. But why should the rest of us collect money from taxes paid by our younger fellow-citizens merely because we reach a certain age?
I think the main problem with our debates is that we so often refer to government programs like these as “insurance.” If social security were truly an insurance program, adjustments could be made based on actuarial science to keep the program solvent. I believe, instead, social security in all its forms, should be considered a compilation of social welfare progams neceassary to help people who do not have the means to help themselves. Warren Buffet and Bill Gates do not need social security payments from the federal government.
This is off-topic, but I bet we could pass legislation making health care and disability payments more accessible for everyone if we used funds available from changing the eligibility dates for social security benefits and setting a means test to qualify for these payments. We probably could make these welfare programs solvent and, I am quessing, go a long way toward fixing our budget problems if such changes were made.
Thanks again for hosting this interesting discussion.
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@Blair (#129):
“Warren Buffet and Bill Gates do not need social security payments from the federal government.”
I see where you’re coming from, but I don’t think it’s very practical. Sure, Warren and Bill might be the 2 richest people in the country right now, but what if they make a few bad investments and end up bankrupt? Do we allow them to collect Social Security then? Or do we shut them out and say “too bad, so sad, should’ve been more careful?”
If you think we should let them in if they should ever lose their cash, then how do you propose we determine whether or not they qualify? Forms and bureaucracy? How much would all of that government infrastructure and means-testing cost? And is it worth it, just to make sure you exclude the richest .0000007% (yes, that’s the actual number!) of Americans?
“we could pass legislation making health care and disability payments more accessible for everyone if we used funds available from changing the eligibility dates for social security benefits and setting a means test to qualify for these payments.”
Of course we could, but that would change Social Security from its current “stored benefit” model to a blatant wealth-redistribution program. I personally don’t think it’s very fair to punish people for living below their means and responsibly saving for their own retirement, while taking their contributions and redistributing them to peers who spent like drunken sailors their whole lives and saved nothing for retirement.
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You know, if I hear one more person characterize the less well-off this way, I’m going to scream. Listen carefully, people: merit is not the only determinant of financial situation. It’s easy for those in good financial shape to attribute their success to being better, smarter people than those in poor financial shape, but opportunity and life events play a huge part.
Personal example: I’m almost 30. My parents were useless drunks, and I had three younger sisters to raise. We were dirt poor, and I had scholarships, but I couldn’t take advantage of them because there were little kids to care for. I didn’t go to college. Then I got married, to a man who was subsequently diagnosed with a terminal illness, so I worked instead of going to school, to help pay for medical expenses. I’m only just now starting college, and will be in my mid-30s before I’m done. I’ll then be able to save for retirement, but my final saved amount will be MUCH affected by events in my life that I could not control. You can attribute that to your being a wiser, more responsible person than I, but that’s just flattering yourself. Yes, some people are idiots, but others just didn’t start from the same place you did, and you should frankly be grateful that you’re going to HAVE wealth to have “redistributed.” With all due respect, get off your high horse.
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Shana@130 – I’m sorry to hear that you have had so many struggles through life. However, you are barely started and there is plenty of time to save enough for retirement.
I grew up in a very poor family as well, started working at age 12 (16 hours/day on a farm). I worked full time to put myself through college. The first ten years of my career life I worked for a charity that didn’t pay enough to support my family. I worked 20 hours/day because I had to take on other menial jobs to make the bare minimum to support my children.
I made a change 15 years ago and because of my hard work (often 100hr weeks), diligence and perhaps a bit of luck have started several business, sold some, and worked as an exec in the corporate world. In short, pulled myself up by my boot straps and now have more than enough to retire. This is AMERICA, I truly believe that anyone, ANYONE (without severe disabilities), can succeed and make more than enough for a reasonable standard of living and save enough for their future.
Perhaps Kevin shares my frustration of watching peers buy two new Beamers, refi their house multiple times for the boat, pool, hot tub, vacations, etc. Meanwhile we scrimp, save, work hard, and actually build up a nest egg. Are we supposed to pay for their retirement because we saved and they consumed everything and more??
For that matter, are you asking me to pay for your retirement? Are you suggesting that the 1000′s I pay into Social Security shouldn’t go to me when I retire. That because I worked 100 hr weeks and busted my butt and made significant money that I don’t deserve the 1000′s each year that were taken from me??
And to all the others that are advocating that the current tax rate structure is so low relative to other periods in history – you’re missing the point. And I’m insulted that some are insinuating that I’m not patriotic for not being joyous to pay 61% of my income in taxes. I do believe in all citizens contributing EQUALLY to support a LIMITED government. I don’t believe in progressive taxes. Why should I be punished because I worked hard and made the most of every opportunity?? I started with far less than most people in life, worked hard, saved hard – why do people feel I should pay for those that don’t do the same??
I get particularly bitter after dealing with so many renters in Sec8 situations that refused to take on more work. I have even offered to hire some to try and help them (yes, even evil “rich” me, I do believe strongly in charity). Having them tell me to my face that they wouldn’t because they would get less Sec8, less welfare, etc., etc., has really embittered me to this ridiculous idea that wealth should be redistributed in any fashion.
Let’s be clear, I’m not “rich”, I’m an upper middle class guy that lives like he’s lower middle class and works very hard. I don’t buy new cars, live in a very small home, take moderate vacations and save, save, save. I work hard for every dollar, always have. When I retire next year (yes at an early age) I will have worked more hours than most do in their entire lifetimes. Why should someone else get my money??? Please stop talking in the abstract, pull out your paycheck and look at what these fools in Washington, your state govt, your local govt are doing to you.
PS – MLR – trust me my tax attorneys spend weeks trying to find the best LEGAL ways for me to minimize my taxes. I refuse to do ANYTHING illegal, I’ve sailed through every audit because every “i” is dotted, every “t” crossed. I spend days with them asking every question I can think of but when we file that book (155 double sided pages last year and that didn’t include any of the backup documentation) called a tax return there seems to be no way to get it lower. How is it reasonable that I have to spend more in tax attorneys each year just to file than most people pay in taxes?? Simple answer – flat tax or sales tax. We could save BILLIONS every year in gov’t spending because most of the IRS would become obsolete.
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“…the IRS would become obsolete.”
There’s a goal we can all agree on. Everyone who is able should contribute to the good of the country. Setting up a flat tax would end the divisiveness of the class warfare that exists over the issue today. Everyone paying the same percentage of income, or, the same percentage of federal sales tax would…
But we’re going to give JD a heart attack if we keep talking tax before Monday.
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I will say this quite frankly — Advocating a sales tax either means you have an agenda or you have been misguided in your beliefs.
Everything the advocates say about it is BS.
The fact that they think people are stupid enough to believe that we could replace the income tax with an inclusive sales tax of 23% (Wonder why they used an inclusive tax? Cause the exclusive number much like we see on normal sales taxes is actually 31%). Estimates for the exclusive tax rate go as high as 50%, with some of the more unbiased sources hovering around 40%.
And these taxes would apply to everything: Government spending just went up 40%. That house you just bought? 40% more expensive + interest on that.
Fact Check has a good analysis of the proposed Fair Tax: http://www.factcheck.org/taxes/unspinning_the_fairtax.html
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@Bear #132: but Social Security has never been an IRA system — it’s not the money you’ve paid in being held for you personally, it just goes into the pot. I’m not asking you to pay for my retirement — it’s the system that we all live and work under. Yes, I’m (theoretically!) expecting Social Security when I retire. No, I don’t know exactly how the numbers will stack up w/r/t amount I’ve paid in vs. amount paid out to me. I’m just saying that it’s unfair to complain about “wealth redistribution” by accusing those who, for WHATEVER reason, don’t have enough personally saved to support themselves in retirement without Social Security of “spending like drunken sailors” and “saving nothing.”
The bottom line, to me, is that adults engaging in a reasonable debate have a responsibility not to take the worst example from the other side and base their arguments on that. I bet there are some really selfish, crooked rich people I could rail against, but it would undermine the discussion.
Example: in the welfare discussion, anti-welfare people go on and on about women (usually black, though few people say it) having loads of babies out of wedlock and driving around in pimped-out Caddies, all on poor Joe Responsible’s dime. Yeah, there are some people who work the system. But there are PLENTY of others who don’t, who work hard and are honest, struggling single moms, maybe, with crappy cars or maybe just a bus pass, and I think it’s irresponsible to assume and/or argue that those you oppose are without merit.
Which brings me to a point I’ve had to make many times, even in college classroom discussions: the fact that I don’t agree with you (collective “you”) doesn’t mean that I’m ignorant or haven’t considered the facts carefully enough — it just means that I don’t agree with you. My position is as legitimately derived as yours. And not everybody who doesn’t agree with [the conservative side of this/any issue] is a deadbeat or mooch.
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@Shana (#131):
Wow, you’ve had a really rough go of it. I commend you for your strength and perserverance. I’m not being trite, that’s sincere.
I apologize if I wasn’t clear, but I most certainly did not mean to begrudge the truly worse-off their Social Security benefits. As Bear correctly noted, I was simply voicing my frustration at the idea that my neighbors – who make the same income as I do – should be entitled to MY Social Security contributions (instead of me), just because I prudently saved my money and lived below my means, while they blew theirs (and a good chunk of the bank’s) on boats and vacations.
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Bear, you missed the point of Shana’s comment.
The point was that we can’t control our circumstances. There are people who are not well off, who are poor, not through any fault of their own.
I wouldn’t say that anyone without severe disabilities can make it. I would say that anyone without severe disabilities has a *chance* at making it. Our lives are not deterministic, but governed by probability.
You saw your chances and you took them. Other people coming from your situation may be too mentally damaged, their psyche’s too scarred, to respond the same way. Mental “disabilities” can be just as large a problem as physical disabilities. JD has talked a lot on this blog about how digging out of his financial hole depended on overcoming damaging mental blocks. Its not as simple as “just do it.” Well, it is and it isn’t.
Limited government is not a cure-all. Nor is government doing everything. There are valid reasons to have many of the social safety nets we have. If my parents became sick I would appreciate the existence of the family medical leave act. If I were paying off school debt and lost my job due to the recession, I would really appreciate unemployment until I found another job. If I were badly injured and unable to work, I would appreciate medicaid and American’s with Disabilities benefits.
You would want to separate the wheat from the chaff (if these programs exist), I get that, but I don’t get saying “Screw you” to all the hard-working, honest people who get dealt a bad hand in life if the separation is unfeasible. That’s not the kind of (limited) government that I would want.
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@ kevin, 136
If its any consolation, in your retirement with your savings you’ll be able to live comfortably, maybe travel? help out grandkids? Basically enjoy independence and freedom.
But those that blew their early income on boats and debt will be forced to work and pay off their debt. If all they have to live on is their social security at that age, with no savings, they’ll be scraping beans out of the bottom of the can.
Its hard to be the ant to their grasshopper until that day arrives, but I find far more to pity in them than to envy.
But don’t worry, they’re not entitled to your social security contributions. You and they will be receiving the contributions of future generations.
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Shana – thank you for your response. My apologies if my post comes across as attacking you. That wasn’t my intent, I was trying to personalize the discussion because too often we talk in the abstract when it comes to gov’t and taxes. The reality is someone has to pay in order for someone else to receive the benefit/service (even if that someone is the same person).
It’s a bit ironic that you felt as though I was belittling you or your opinion. I felt the same way about several other posts. Particularly yours @ 125. You seem to indicate if you’re conservative that you have no right to an opinion about how much you are taxed.
I’d like to add more but this is obviously not a great forum for that discussion. Too bad we all couldn’t meet in a coffee shop on the corner and have a face to face discussion. Lots of very well reasoned opinions here, I’m sure we could all learn a lot if we kept an open mind.
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@137, 138 barnetto-
eloquently and intelligently put.
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Very nice article. I learned a lot on this subject from the documentary I.O.U.S.A. I thought the film made this stuff easier to understand, and also made me really depressed
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