***Unless otherwise noted, all numbers are from Wiki's "2012 United States Federal Budget" and/or Treasury Dept Website***
Like Pavlov's dogs, American voters start drooling whenever they hear the words "Tax Cuts." The problem is that tax cuts are a terrible policy choice for a country that's already $16 trillion in debt, and adding another $1.1 trillion dollars each year.
Alas, the lure of easy votes has a very strong appeal. Both parties sometimes succumb, but in this election, Governor Romney's 20%, across the board tax cut plan is the centerpiece proposal.
I. We Need Tax Increases.
By asking for a tax cut, Governor Romney has, at a minimum, taken tax increases off the table. Even if we assume Governor Romney's tax cuts will completely pay for themselves -- which they won't; the assumptions underlying them are completely unrealistic -- still the best we could hope for next year is $2.7 trillion in government revenues (that's this year's $2.47 trillion + the added revenue if the economy expands at the rate currently expected by the GAO).
II. $2.7 Trillion Ain't What It Used to Be.
That sounds like a lot, right? Unfortunately, Governor Romney's already spent it all on only four budgets:
1. $830 billion on Social Security. The $830 number was FY 2012's expenditure, but Romney's promising no changes for seniors or "near seniors". So, it won't get cheaper any time soon.
2. $870 billion on Medicare / Medicade. Same note as # 1.
3. $688 billion on Defense. Governor Romney has actually pledged to INCREASE defense spending.
4. $360 billion for Interest payments on our debt, a budget that can't be cut. Source: FY 2012, Treasury Dept website.
TOTAL: $2.75 trillion, or 100% of Romney's expected tax revenue next year, spent in only four budgets.
III. Who Would We Have to Stiff to Stop Spending Right There, With a Balanced Budget?
Everybody. We'll be out of tax revenues before spending a single dollar on any of the following departments: Homeland Security, State, Energy, Commerce (SEC), Transportation, Education, Veterans Affairs, DOJ, Agriculture, NASA, Treasury, Interior, Labor, HUD, the SBA, the EPA and about 20 other, lesser departments.
Last year, those departments cost about $1.3 trillion. Here's the absurd part: Even if President Romney could cut all those departments by 30% -- and that seems like a profoundly bad idea for Homeland Security, Veterans Affairs, Energy (nuclear power safety) and some of the others -- we'll STILL add our 17th trillion dollars to the debt next year.
IV. What Can We Do About It?
Nothing. Unless American voters prove wiser than Greek voters and Spanish voters and Italian voters -- and so far they haven't -- then bad tax cut proposals will continue to be popular and our country will continue on its trajectory into the abyss.
Oh, wait a minute. I think I messed that flat tax stuff up.
Until the 47% thing broke, I'd always thought of social security and payroll withholding taxes as a part of personal income taxes. My head was thinking that way again when I was analyzing the initial flat tax numbers, so I was replacing the $2.0 trillion combined total of personal income taxes and payroll withholding with only $1.165 trillion in new money from the flat tax.
Sorry, my bad.
The true choices were only these:
1. We would have to pay $2.0 trillion out of the flat tax, to replace the combined total of the personal income tax and the SS and other payroll withholding segments of the tax revenue table. That would require a far less appealing flat tax rate of 20.4% (2T divided by 9.8T).
2. Otherwise, taxing the 47% with a flat tax of any amount will actually INCREASE their current tax burden, a public policy option I would never choose for the poor.
Problem I see with that is that not all the 47% is below the poverty level. Wouldn't it be better to determine what level would be taxed vs. Tax revenue needed? Imagine the fight between some people to try and get in on the 47%.
I think if you make above x, you pay y%. No more credits if you don't make above x. You get what you make. Eliminate the absurdly complex deductions. And I believe the amount for payroll taxes was already included in one of the other categories. Could be wrong.
Also not sure we should have the individuals be responsible for making up the entire deficit...I think it should be proportionate...corporations should also share.
Question I have is this...what do we do with capital gains and dividends? Would not want to stymie investment capital, otherwise this could be counter productive.
@stock, I'm totally with you on the getting rid of government waste, but the devil's in the details: which waste, where, and how much will it save us? Also, are we certain to be able to get Congress to cut it? One's man's waste is another Congressman's pork.
On spending cuts, I'm prepared to go much further than just wasteful spending, I'm prepared to cut non wasteful spending, too. We need to close a $1.2 trillion budget deficit, and that's going to take a lot of good ideas.
That's why I don't think we can balance the budget without BOTH tax increases AND spending cuts. The numbers (avail in Wiki's "2012 US federal budget") are horrifying: we collect about $2.5 trillion in tax revenues, but spend $3.7 trillion, leaving an unacceptable $1.2 trillion shortfall.
Neither party's solely responsible for the deficit. Both are guilty. Politicians just can't resist promising the impossible combination of spending increases and tax cuts, and voters aren't smart enough to realize they can't get both of those things without exploding the debt.
The national debt's a problem bordering on a crisis. Our choices are these: make the painful but necessary decisions to cut spending and raise taxes, or ignore the problem and just keep borrowing.
We wouldn't be the first nation to choose to ignore the problem. Greece, Spain, and Italy have all done the same; I'm just not sure that's much of a recommendation.
I agree...like removing the abuse of the entitlements. I actually assumed this was a given...if we don't get that corrected, this country will get consumed like a flesh-eating bacteria.
What about MAGIC LOOPHOLES??? I'm sure we can find enough of them to pay for tax cuts. Who cares that tax cuts have failed before?? The fifth time is the charm. I'm sure they'll work this time.
The Economists' statement opposing the Bush tax cuts was a statement signed by roughly 450 economists, including ten of the twenty-four American Nobel Prize laureates alive at the time, in February 2003 who urged the U.S. President George W. Bush not to enact the 2003 tax cuts; seeking and sought to gather public support for the position. The statement was printed as a full-page ad in The New York Times and released to the public through the Economic Policy Institute. According to the statement, the 450 plus economists who signed the statement believe that the 2003 Bush tax cuts will increase inequality and the budget deficit, decreasing the ability of the U.S. government to fund essential services, while failing to produce economic growth.
I think this is finally a thread that is politically neutral enough to address. Too many whacko threads lately, so I just have stayed away.
Anyway, I think this may be another opportunity for some joint research. I personally like the idea of a flat tax, but want to appropriately accommodate the lower incomes, while not making it an incentive to avoid income taxes.
One way to approach this is to look at the composition of revenue as it exists today, and project that forward based on the desired revenue level, to include national debt reduction, budget growth (or, who knows, even contraction), etc. So for example, in 2009 (latest figures I could find), personal income for all categories, excluding the lowest of incomes, was just under $11T. What I think we could do is create a contribution pie that shows the source of federal revenue by category (corporate, personal, and all others), and project out what we actually need based on the same ratio. Then...whatever that ratio is for the personal income levels, we could easily calculate the flat tax required to support our budget....whatever budget means today.
I realize that today it would be purely hypothetical, as it would require insight we really don't have. But, I think it would give us a gauge to where a flat tax would roughly be. Based on some rudimentary analysis I had previously done, it falls somewhere around 18%, but that could have changed.
Hey, TT, it's always a pleasure to see you!
1. OK, cool, let's investigate. At Wikipedia's "2012 United States federal budget" entry, tax revenues are broken down like this:
2012 Total Tax Receipts
$1165 billion -- Individual income tax
$237 billion -- Corporate income tax
$841 billion -- Social Security and other payroll tax
$79 billion -- Excise tax
$31 billion -- Customs Duties
$11 billion -- Estate and Gift taxes
$81 billion -- Deposits of earnings and Federal Reserve System
$24 billion -- Other miscellaneous receipts
Grand Total: $2.5 trillion in tax revenues (vs. total spending of $3.7 trillion, leaving a $1.2 trillion deficit for 2012).
2. I found a 2011 number for personal income at $13T. For a flat tax to replace the current personal income component equally, we'd need to produce $1165 billion in taxes. By my math, that should only require a flat tax rate of 9% (1.165T divided by 13T).
Maybe there's something to this whole flat tax thing, after all.
3. So, then, to replace the current system's income tax component of $1.1 trillion with $2.4 trillion, the amount needed to balance the budget next year (assuming no spending increases), we could do it at a flat tax rate of only 18.5% (2.4T divided by 13T).
Those numbers seem doable to me.
4. One reservation, though. That 13T personal income number doesn't exclude the poor in any way, something I'd want to do. Is there a way to find out how much the first $15k per year amounts to of that $13T?
0 to 1 million is taxed at a flat 15%, no deductions. Any dollar above 1 million is taxed at 25% for individuals and business'.
The rich then can't deduct their second home, or get lower rates for capital gains/dividends, and the welfare recipients would stop getting free checks of 8k during tax time. Romney would have had pay more, and the welfare recipients would not get billions on refundable credits for free.
Not only would more revenue be coming in, but they can then cut the IRS spending, because they would not need to do as much auditing for thousands of deductions, loop holes, etc.
Sentiment: Strong Buy
I dislike the impact of flat taxes on the poor, but I'm open to any suggestion that can fix our country's miserable financial situation.
1. How much tax revenue would your proposal raise, as you've made it? We need more than $2.5 trillion on this year's numbers for it to be an improvement over the current system.
2. Can we change the numbers to keep a 0% rate in place for those in poverty, say on the first $15k per individual or $30k per family? How much would it raise then? What would we have to raise the $1 million+ rate to, to pay for the $15k exemption?
3. The savings on IRS spending is de minimus. In FY 2012, IRS spending accounted for 0.35% of the federal budget ($13 billion of $3.7 trillion).