A Look at Our Debt and How We Got Here

Rumor has it that the federal government has a bit of a money problem. For the fiscal year 2010, only 62.6% of the spending in the government budget was paid by taxes. Take away Social Security from the picture, since including that in the overall budget is just another form of borrowing, and you get 47.1%. That’s about $1.5 trillion that isn’t paid for by anything that the government takes in, other than borrowed money. About $200 billion of that is interest, and at the rate we’re borrowing money, that interest expense is going to keep on rising. I’m not a deficit hawk, far from it, but I can see a problem when it’s staring me right in the face, jumping up and down and flailing its arms around.

What does the government receive in revenue? There are, of course, corporate taxes. This brings in about $200 billion at a tax rate of 15-35%, depending on the taxable income of the corporation. That’s a typical corporate tax rate for industrialized countries (35%, however, is among the highest in the world), although many have ones at around 25%. What makes America special is that is has plenty of loopholes and tax exemptions so that some large corporations don’t have to pay any taxes, which clearly hurts government revenue. We used to get 32% of our income from corporate taxes back in 1952, but now that’s down to 9%. Corporate tax reform is needed to make sure that companies pay their fair share of taxes, although, for the sake of jobs, the corporate tax rate could be lowered to make America more competitive worldwide.

Moving on to the mysterious phenonemon that causes your paycheck to appear much lighter than you think it should be, otherwise known as the personal income tax. This accounts for about 70% of government revenue when social security is taken out of the picture (and social security income also comes from its own income tax). Americans in general are not taxed very highly. According to the Tax Policy Center, in 2006 U.S. taxes (all levels) accounted for 28% of its GDP, while the Organization for Economic Co-operation and Development (OECD) average, which includes most developed countries, was 36%, with most European countries being over 40%. Although most OECD countries rely more on consumption than income taxes, it still stands that Americans are not “over-taxed”.  Breaking down the amount that the government receives- it received 21% of its GDP in taxes in 2000 (note that in 2006 the 28% I mentioned earlier counted taxes on all levels of government). As a result of the Bush tax cuts, this fell to 16% in 2004 and got to below 15% by 2009/2010.

Since I brought up the Bush tax cuts, I’ll discuss them more. In 2000, when we had a decent budget surplus following the Clinton administration, individual income taxes were 10.3% of the GDP, yet this fell by 3.3% following the Bush tax cuts, which was accompanied by a 0.5% of GDP drop in corporate taxes and 0.4% of GDP drop in payroll taxes for Social Security and Medicare. We should have had a surplus of $5.6 trillion from 2002-2011, but needless to say that never happened. Tax rates changed after Bush took office, going from 39.6% for the wealthiest (15% for the poorest) to 35% and 10%, respectively. This resulted in lost revenues totalling about $2 trillion, or about 14% of our total national debt. Then we can add $1.2 trillion for the wars in Iraq and Afghanistan, $800 billion for the stimulus package (yay, more tax cuts), $50 billion annually for Medicare Part D, a few hundred billion annually in interest payments, and that’s how we got from a $5.6 trillion debt and a budget surplus to where we are today. Tomorrow I’ll write about a possible solution for the debt problem, but it won’t be pretty and it’ll involve things that both Democrats and Republicans would love and hate. It’ll involve tax increases, tax reform, spending increases, very large spending decreases, and in the end it’ll be something that will be painful to look at. However, a debt this big is too big too be political- it’s an issue of national security and stability.

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