To raise revenue or cut spending? That is the question. America remains dividing over how to manage the budget deficit. The right wants spending slashed. The left wants to raise taxes on the rich. So how do you actually balance a trillion plus deficit? Well first, we need to understand how we got to this point.
Contrary to the assertions of the republicans, the US is facing a major revenue shortfall. Using the 2007 fiscal year as the base year prior to the onset of the great recession, American tax receipts were over $445 billion lower in FY 09-10 than in FY 06-07.
Contrary to the assertions of the democrats, the federal government has funneled substantial national assets to both Wall Street and Main Street. The increases to spending on Social Security, Income Security, Medicare and Health totaled $438 Billion in FY 09-10 compared to FY 06-07.
The great recession of 2007 resulted in a combination of lower revenues and higher expenses adding over $880 billion to our national deficit. Throw in a small expense called the 2009 stimulus – subtracting out TARP loans recovered – and actually accounting for the wars in Iraq and Afghanistan netted America the highest deficit in our nation’s history at $1.5 trillion.
The good news is that increased revenues in FY 10-11 and lower expenses reduced the national deficit to $1.2 trillion. This year’s national deficit is projected to remain basically unchanged due to the payroll tax holiday and other spending. Unfortunately, most Americans do not realize that personal income tax revenue have never totaled $1 trillion in any Fiscal Year.
If the tax rates of every filer today were doubled, our revenues would still not equal solve our deficit. The income tax tables notes it is impossible to simply raise the rates on our most affluent to net a trillion in new revenues. Even tripling the tax rates of the most affluent to 100% of their adjusted gross income would still leave the nation with a deficit.
While the numbers don’t lie, they don’t reveal the whole truth either.
Today, Social Security pays out annually more than it receives in taxes. Social Security’s balance of payments has increased by $200 billion since the last years of the Clinton surplus. When you add in the fact that Medicare/Medicaid expenses now total over $800 billion per year with less than $200 Billion in direct payroll contributions supporting the entitlement programs – 1.40% employee/employer payrolls taxes – it should be apparent to all, America faces serious general and entitlement revenue challenges in addressing her deficit.
Therefore, America's budgetary challenges can be separated into two distinct problems:
1) How to reform entitlement programs to lower their costs while increasing their funding
2) How to restructure our non-entitlement funding to minimize the need to increase taxes
The Center for Medicare & Medicaid Services (CMS) have recommended an increase to the FICA rate (the tax that pays for Medicare & Medicaid) which has not changed since 1987. From former CMS Director Donald Berwick to Chairman Paul Ryan, there are no shortage of ideas to reduce costs without adding undue burden by program beneficiaries.
As for addressing our non-entitlement deficit, reforming the tax code to broaden the base, minimizing deductions thus enhancing revenues is no longer a debatable subject. The devil will be in the details. Yet without reductions in spending, with defense being a target, few are willing to refute we cannot tax our way to a balanced budget.
America faces two truly unique budget deficits entitlements and non-entitlements with both demanding reform and restructuring. The sooner we as a nation admit this fact, the sooner we can begin addressing it successfully.