Friday, July 22, 2011

The great debate: more taxes vs. less spending


As Congress debates whether our massive budget deficits should be reined in by raising taxes or by cutting spending, it seems appropriate to republish the above chart. What it shows is that the top 10% of income earners paid 70% of all income taxes in 2008 (most recent data available). Moreover, it shows that the share of total taxes paid by the "rich" has increased substantially since the early 1980s, despite a huge reduction in the top marginal tax rate. If that is not a vindication of the Laffer Curve, I don't know what is. What the chart doesn't show is that the top 5% of income earners paid more in income tax than the other 95%, and roughly half of all workers pay no income tax. In short, the federal income tax burden is being shouldered by a small minority of taxpayers. This minority is now being subject to a "tyranny of the majority," in which the majority of those in Congress are trying to decide whether the minority of workers should effectively pay all the bills for everyone. In that context it's gratifying to note that according to a CNN poll, "two-thirds of voters favor the idea of tying a raise in the debt ceiling to spending caps and a balanced budget amendment." Congress may be out of touch with the people on this one.


As Milton Friedman taught us, the burden of government is not measured by taxes, but by spending. Whether a deficit is financed by raising taxes or by borrowing more, in the end, resources are taken from the private sector and spent by the public sector. That transfer imposes a burden on the economy since the public sector almost always spends money less efficiently than the private sector. So not only is the debate about who should pay for the huge increase in spending over the past several years, but also whether government spending should continue at such high levels. 


UPDATE: For the sake of perspective, I am republishing the following charts which show the different ways in which the federal government taxes and spends (currently at an annual rate of almost $3.6 trillion) our money:




19 comments:

Benjamin said...
This comment has been removed by the author.
Benjamin said...

The chart Scott Grannis has posted is of federal income taxes (it excludes payroll taxes).

Okay, fair enough. For this discussion, let's leave Social Security/Medicare payroll taxes off the table, and the programs financed by such taxes.

That leaves us federal spending financed by federal income taxes. That is what this chart is about.

More than one-half of federal income taxes are eaten up by the Department of Defense, Homeland Security, the VA and the USDA.

I assume since Scott Grannis has posted a chart of federal income taxes and has stated that such taxes should not be raised, and that federal programs should be cut, then Scott Grannis is calling for major cuts in Defense, VA, Homeland Security and the USDA.

I wholeheartedly support Scott Grannis in this position--and I would like to also to trim payroll-tax financed entitlements as well.

Benjamin said...

BTW, here is a table of federal employment by agency.

Tell me where to cut.


Department of Defense 3,000,000
Veterans Affairs 275,000
Homeland Security 250,000
Treasury 115,000
Justice 112,000
Energy 109,000
USDA 109,000
Interior 71,000

Labor 17,000
HUD 10,000
Education 4,487

John said...

Benjamin: Exactly. What do we want to cut?

Like Jerry Brown said recently, "people around here don't want to cut, they don't want to tax, they don't want to do anything."

Benjamin said...

John--

Worse, they say let's cut entitlement outlays, but not federal agency spending.

Federal agencies, civilian and military, are 80 percent coprolite.

Taxes? As the late, great Senator Russell Long, D-LA, Finance Committee Chair used to say, "Don't tax you, don't tax me, tax that man behind that tree!"

As for me, I just want federal taxes and outlays to sink below 16 percent of GDP, and we can get there through some entitlement cuts, and a heavy re-vamp of our military outlays.

I would like to eliminate all federal pensions, including military, and set up voluntary programs self-funded by the federal employees themselves.

And do we need a USDA anymore?

Benjamin said...

OT but interesting:

Ray Dalio runs the largest hedge fund in the world.

Basically, he says the USA has to deleverage. He says that will take 10 years. It could happen more quickly if we print more money, and deleverage that way through some inflation, and attendant boosted economic growth.

So the question becomes this: Is maintaining low inflation worth 10 years of economic rot?

I suggest that 10 years of economic rot is far too high a price to pay just to some anal bean-counters can praise low inflation rates.

W.E. Heasley said...

“As Milton Friedman taught us, the burden of government is not measured by taxes, but by spending. Whether a deficit is financed by raising taxes or by borrowing more, in the end, resources are taken from the private sector and spent by the public sector. That transfer imposes a burden on the economy since the public sector almost always spends money less efficiently than the private sector“. - Mr. Scott Grannis

The current “spending” [Friedman’s point] is an argument framed by certain politicos as “needed, necessary, required”. Stated alternatively, spending as being “needed, necessary, required” is an argument with no arguments, with the tag line being supposedly enough evidence to substantiate the spending. Further, an implicit argument exists within “needed, necessary, required” that revenue must then follow [tax increases].

However, “needed, necessary, required” [spending] has many components (which Mr. Grannis is well aware but did not list due to brevity) beyond “imposes a burden on the economy since the public sector almost always spends money less efficiently than the private sector”. Two of those many components are:

(1) politico spending through the mechanism of government, generally, and especially that associated with bureaucratic regulation, in many/most cases creates impediments to economic agents which are attempting to make optimal decisions in their own self interest. The impediments to economic agents impede the ability of markets to clear,

(2) the spending [needed, necessary, required] is merely other peoples’ money used in the political constituency building exercise used extensively by FDR and copied and continued to the present day by many politicos.

John said...

As Barry Ritholtz points out, Reagan never signed a budget that was below 21 percent of GDP.

The Wikipedia claims the recent jump in federal spending as a percent of GDP is due to previously unaccounted for war spending.

Dr William J McKibbin said...

Note that debating "spending less" versus "taxing more" is really the flip sides of the same coin called "austerity" -- the fact that this debate has ended in an impasse (in Europe, the US, and even California) highlights why austerity fails, which is the chronic lack of a public mandate -- said another way, austerity measures are failing, which leaves only two other macroeconomic ways forward: default or monetary expansion -- we will see whether the US eventually falls into default or monetary expansion in the coming months...

John said...

Republicans have never demanded from a Republican president the kind of austerity they are demanding from Obama.

Benjamin said...

John-

I am no Democrat. I think they are crazy when they demonize business. That is bad government, and bad for the economy.

That said, the GOP has gone bananas, braying about gold, the need for tight money (which they never talked about in the Bush years), and cutting spending (they also forgot about spending during Bush jr. ).

In fact, we need a Fed that targets aggressive growth now, and a balanced budget.

Are ultra-low inflation rates worth 10 more years of economic rot?

Not for me, jack.

John said...

If one calls attention to Honeywell using prison labor to fix its copiers for less than $1 per hour, or a Honda parts supplier in Ohio using prison labor at similar cost, is that demonizing business?

John said...

Interesting read:

"21st-Century Slaves: How Corporations Exploit Prison Labor
by Rania Khalek

In the eyes of the corporation, inmate labor is a brilliant strategy in the eternal quest to maximize profit."


This is a classic business-government partnership. Like I said before, business and government are two sides of the same coin. The debate is really over which side lands on top.

Paul said...

John,

"Republicans have never demanded from a Republican president the kind of austerity they are demanding from Obama."

They would have if a Republican president had spent as mindlessly on failed liberal programs as Obama.

John said...

Failed liberal programs?
42 percent of the stimulus was tax cuts. Much of the rest of the stimulus was paid to corporations for ARRA projects. Much was paid to states to cover unemployment costs.

Do Republicans propose to end unemployment insurance? What exactly are the "failed liberal programs?" The Afghan war? Please be specific.

brodero said...

Get a Republican president elected
But don't screw with the capital
markets...insanity....

Frozen in the North said...

Scott, while your analysis is correct in that the wealthiest pay the bulk of all taxes, it remains that America's wealthiest control a bigger share of the economy.

Of course America's richest 10% pay the most taxes, they also own more than 50% of the economy, and their share has been growing dramatically over the past 30 years.

Mike Eliason said...

Scott, I'm curious about your position on the debt ceiling. Do you think that the conventional wisdom is right that we're poised for a cataclysm if a deal isn't reached this week? Will we have similar trouble if US credit is downgraded from AAA?

Scott Grannis said...

It seems almost inconceivable that the debt limit will not be raised. The good thing about all this posturing in Washington is that the debt limit is forcing us to focus on the fact that we have a big problem. I think the problem is spending, not taxes, but the Dems think it's spending and taxes, and they appear to be out of synch with the mood of the country.

Even if the US is downgraded, a positive shift in fiscal policy would outweigh that in my view, since it would reinforce a positive outlook for the future.