FEDERAL BUDGETMYTHS AND REALITIES

Empowering citizens with knowledge necessary

to shape the nation’s future

Deficit Fever

Is it a disease or a symptom?

How sick is the patient?

What’s the cure?

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.)

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.

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

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.

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Clearing the Air 2

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 1976-77—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, 2011

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The Three Causes of Deficits and Debt

1. Spending

2. Tax policies

3. Whether the economy (as measured in GDP) is growing or contracting

Federal spending, federal debt, and GDP (averages)

Fiscal Year Federal spending Federal debt Gross Domestic Product

1978-2005

Democratic + 9.9% +4.2% +12.6%Presidents

1978-2005

Republican + 12.1% +36.4% +10.7%Presidents

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)

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 debt3.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.

FY 2008 Spending Budget: $2.983 trillion as usually presented

(chart numbers in billion $)

FY 2008 Spending Budget: $1.732 trillion without trust funds and interest on debt

(chart numbers in billion $)

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

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.

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.

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.

1940 1950 1960 1970 1980 1990 2000 2010

TAXATION OF HIGHEST INCOME BRACKETHISTORICAL VIEW

Taxation of Capital Gains

Year President Maximum tax rate

1979 Carter 28%

1982 Reagan 20%

1996 Clinton 29%

2006 G.W. Bush 15.70%

The Bush tax cuts added

$1.7 trillion to the nation's debt

over 2001-2008.

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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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.

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Widening inequality of wealth

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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