Washington, We Have a Revenue Problem

This piece is the first in a six-part series on taxation and a joint project by The American Prospect and its publishing partner, Demos.

The United States has a revenue problem. Taxes at all levels of government are too low to balance budgets and, more important, to ensure America’s future prosperity and cope with an aging population. While many political and policy leaders argue that future revenues should reflect “historic norms,” this is a flawed assumption on which to base long-term fiscal planning.

Tax revenues have accounted for around 18 percent of GDP since World War II, and 18.3 percent over the past 30 years. The budget released by Paul Ryan and the House Budget Committee proposes average revenue levels at this same level—18.3 over the next decade. (Although an analysis by the Tax Policy Center found that the average would in fact be 15.4 percent.) The Simpson-Bowles plan, released in late 2010, proposed average revenues of 19.3 percent through 2020. Meanwhile, the Obama Administration’s 2013 budget proposal sets revenues at 19.2 percent of GDP over the next decade.

All three of these proposals would provide inadequate funding to the federal government. Indeed, each creates a funding shortfall and continued deficits: Simpson-Bowles projects average deficits of 2.8 percent of GDP; the Obama budget, 3.3 percent; and the Ryan plan 1.7 percent. While deficit spending at such levels is acceptable, these numbers are testament to the simple fact that revenue levels at, or even slightly above, historical levels will lead to trillions of dollars in new debt over the next decade. By its own estimates, even the Ryan budget would add $4 trillion to the debt over the next decade—realistically, that figure would likely be much higher given the difficulty of making the deep cuts the Tea Party leader suggests. 

Looking backward, we also see that “historic norms” of revenue over the past thirty years have been too low, which is why the federal government amassed $12 trillion in debt during this time. The only period, and it was fleeting, that the United States achieved a balanced budget was between 1999 and 2001, when taxes hovered around 19 to 20 percent of GDP for several years. The inability to get by on average revenues of 18.3 percent of GDP for the past 30 years is noteworthy because that period spans five different Republican and Democratic administrations and various configurations of partisan control of Congress. This period also included concerted efforts to cut or restrain federal spending, with this becoming an ostensible centerpiece agenda of the Republican Party, which controlled the White House for a majority of this time and both houses of Congress for about a third of this period. 

In short, the federal government has raised too little revenue compared to the spending levels desired by both political parties. Even without the major challenges surely to come our way, the record points to an obvious need for higher revenues. An aging population and intensified global competition intensifies will only compound this need.

The Boomers Retire

There is no historical precedent for the graying of the U.S. population that will take place in coming years, which will put new strains on public finances—mainly at the federal level, but also at the state and local level. As the Boomers retire, the share of the U.S. population over 65 will increase from 13 percent today to 19.3 percent by 2030; the number of Medicare beneficiaries will rise from 47 million to 80 million. 

The number of Americans receiving Social Security will rise by a similar magnitude, while the ratio of workers to each Social Security beneficiary will fall from 3.4 to 2.1. And because nearly half of all Baby Boomers have not saved enough for retirement, the pressure to maintain and expand Social Security benefits will be intense (as opposed to cutting such benefits, as some suggest.) 

The aging population will also put huge strains on Medicaid, as the population of seniors living in nursing homes doubles or triples between now and 2030. A variety of smaller federal, state, and local-government programs that provide a safety net to low-income seniors will also need to be expanded. Overall, even with major reforms to control health-care spending and some reductions in current entitlement benefits, there is simply no way around the fact that the United States faces a hugely expensive demographic transition that will necessitate higher levels of public spending and revenue to match it. 

Rising Global Competition

The United States is also in new terrain in terms of global economic competition. Leading rivals are making large-scale investments in human and physical capital, and failure to keep up—which has already diminished living standards for many Americans—would have profoundly negative ramifications. Reduced public investment has already put the U.S. at a disadvantage. The United States spends less on education, as a percentage of GDP, than a number of other countries in the Organisation for Economic Co-operation and Development (OECD), which tries to promote economic growth among its 34 member countries. Not surprisingly, we are falling behind in key areas. The U.S. now ranks behind the majority of OECD countries in the percentage of young workers who have degrees in science, engineering, and math, and also lags in the proficiency of school-age students in these areas. While the United States once led the world in the number of young workers with college degrees, it now ranks 12th among OECD countries.

***

The story is similar on infrastructure, another crucial foundation for prosperity. While China puts in thousands of miles of high-speed rail and builds the most advanced airports in the world, and while South Korea has achieved nearly universal broadband access, the United States spends less today on infrastructure as a percentage of GDP than it did in previous eras in which it faced much less economic competition. It lags behind other advanced countries both in how much it spends on infrastructure and the sophistication of its transportation systems. According to one recent study, the U.S. needs to spend $2 trillion just to repair maintain its deteriorating infrastructure. To spent as much on infrastructure as the average among countries in the European Union would require several trillion dollars in additional spending over the next decade. 

Public Expectations of Government

What’s also different about today is that Americans have expansive expectations of government. Although polls show that the public distrusts government, and believes that much public spending is wasteful, Americans strongly back the most expensive programs,  Social Security and Medicare. Majorities of the public oppose drastic cuts to these programs. Medicaid, commonly seen as less popular, also commands strong support when Americans understand how large a share of spending on this program goes to support seniors in nursing homes. 

The public is enthusiastic about other areas of government spending as well. Large majorities support spending on education, veterans, food safety, air-traffic control, parks, and space exploration. In general, Americans also favor a strong military and national-security establishment. The areas of government that the public dislikes, most notably foreign aid, account for a very small fraction of government spending. 

Higher Revenues Also Needed at the State and Local Level

It’s not just the federal government that will need to raise and spend more money in coming decades; it is also state and local governments. Indeed, spending at this level is arguably more crucial to our future prosperity. In the fiscal year 2012, state and local governments spent a combined total of $3.1 trillion, an amount equal to the federal total when one takes into account the $580 billion that the federal government transferred to states and localities. A large share of state and local spending is what can be called “social capital”: investments in the very things that will help fuel future growth, such as education, housing, transportation infrastructure, and parks. Seventy-five percent of all spending on transportation and water infrastructure is by state and local governments and 90 percent of K-12 education spending is by state and local governments. 

What’s alarming, though, is that state and local social capital spending has declined over the past 15 years, primarily because of a revenue crunch. While aggregate state and local revenue has remained largely unchanged as a percentage of GDP since the 1990s, state and local “non-social capital spending”—health care, pensions, and debt—has been increasing rapidly over the past 15 years, causing the share of spending devoted to social capital to decline. If state and local government spent the same percentage of their budgets on social capital investments in 2009 as they did in 1996, they would have spent $187.6 billion more on the building blocks for our future prosperity. The fiscal crisis that beset the states has exacerbated this situation, but this is a long-term trend. 

 

The levels of future tax revenues envisioned by most political leaders in Washington and state capitals are certain to be inadequate given new challenges facing the United States. Much higher revenues will be needed if the nation wishes to stay economically competitive in a globalized economy and offer basic security to the largest generation of retirees in its history. Controlling health-care and pension costs and other kinds of spending—particularly defense—is imperative, but even substantial savings in these areas will not forestall the need for higher revenues levels than most political leaders now wish to contemplate. 

What levels of revenue will actually be needed? Revenues would need to be 22 percent of GDP on average over the next decade just to achieve fiscal balance under either the Simpson-Bowles or Obama Administration budget plans, both of which cut spending in important areas. Avoiding deep cuts and actually increasing public investment in the foundations of prosperity would require federal tax revenues closer to 24 percent of GDP. Meanwhile, revenues at the state and local levels would also need to rise. All told, the United States may be looking at combined federal, state, and local revenue needs in the range of 40 percent of GDP during coming decades as the Boomers retire, depending upon how much debt is considered acceptable. 

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Comments

If taxes would solve problems, then all the world's problems would have been solved long ago.

You need to think further outside the box, rather than reapplying the same failures as a new solution.

www.behappyandfree.com

Government spending as a percentage of GDP is 40% right now.

Taxes are fairly irrelevant considering how fast the national debt is being increased. In any event, if taxes on the rich are increased, they do not really pay them. They do not change their standard of living in any way. The only thing that will happen is that the cost of whatever they get their money from will increase by the amount of the increase in their taxes, and we will pay it when we buy their product or service. People who work for a living pay all taxes. But an economy based on borrowing trillions of dollars every year makes any arguments over taxes not even worth discussing. What Americans are going to have to do is start paying the debt directly, completely bypassing party politicians, who have no motivation to do anything except increase the debt. What Americans need to do instead of sending money to party politicians is to send the money to

Bureau of the Public Debt
P.O. Box 2188
Parkersburg, West Virginia
26106-2188

Last year more than three million dollars were donated to this worthy cause. This is certainly significant. If the people donating were contributing fifty dollars each, as many as 60,000 Americans are trying to pay the debt instead of increasing it. The only question remaining is what attitude the parties will take. Since both major parties enrich their privileged classes through money borrowed on national credit, what remains to be seen is whether the parties will take the position that trying to pay the debt is a form of disloyalty or treason. Well, we will just have to see what direction party leadership takes. My personal opinion is that they will not because they need that $3,000,000 of real money in order to keep running their scam.

Taxes are not irrelevant-The National Archives has just released a once-secret report that helps us understand how incredibly much we today coddle the wealthiest among us.
he newly released 1943 data make for absolutely stunning reading. We have simply never had clearer evidence of just how much America used to expect out of individual wealthy Americans — and just how little, by comparison, we expect out of our wealthy today.

We learn, for instance, that 1941's top executive at IBM, Thomas Watson, collected $517,221 in compensation that year, about $7.7 million in current dollars. Watson paid 69 percent of his total 1941 income in federal income tax.

Last year, today's chief exec at IBM, Sam Palmisano, took home $24.3 million for his executive labors. We don’t know how much income above that sum Palmisano reported in 2009, or exactly how much of that total he paid in taxes.

But we do know that the 13,374 Americans who reported incomes over $10 million in 2008, the latest year with IRS stats available, paid an average 24.1 percent of their taxable incomes in federal income tax.

In other words, IBM CEO Palmisano last year took home, after adjusting for inflation, over three times more than his predecessor Thomas Watson took home in 1941. Yet Watson in 1941 paid almost three times more of his income in federal income taxes than Palmisano likely paid in 2009.

Or consider the IRS report data on Carl Swebilius, the 1941 top gun at High Standard Manufacturing, a corporation flush with war-time defense contracts. Swebilius that year made the contemporary equivalent of $9.4 million from High Standard. He paid 73 percent of his total overall income in federal taxes.

The closest counterpart to Swebilius in Corporate America today? That might be Robert Stevens, the CEO at defense contractor Lockheed Martin. Stevens made $21.6 million last year. Over the last three years, he has annually averaged $30.5 million, over triple the 1941 inflation-adjusted Swebilius take-home.

Again, we don’t know exactly how much in federal taxes Stevens paid last year. He most likely, given the IRS figures for his income cohort, paid a bit over 20 percent of his total income in federal income taxes, less than one-third the 73 percent of income that Swebilius paid out in federal taxes in 1941.

In that year of world war, America's wealthy faced an 81 percent tax rate on income in the highest tax bracket. That top rate would move to 88 percent on income over $200,000 in 1942 and 94 percent in 1944 and 1945.

Today, by contrast, the top marginal rate in the U.S. tax code sits at just 35 percent, inspite of an ongoing war in two arenas. If Congress lets the Bush tax cuts for income over $250,000 expire the end of this month, the top rate would move to 39.6 percent in 2011, still less than half the top rate in effect 70 years ago at the start of World War II.

Democracy cannot be safe, President Franklin Roosevelt warned Congress in 1938, “if the people tolerate the growth of private power to a point where it becomes stronger than their democratic State itself.”

The richest 1.5 percent of Americans, FDR would go on to note in that 1938 message, were raking in as much income as everyone in America’s bottom 47 percent combined.

Our contemporary super rich, research from Berkeley economist Emmanuel Saez documents, are actually taking home a substantially higher share of America's income than their counterparts back in FDR's time.

Americans of FDR's time worried deeply about the concentration of economic power. Today, 70 years later, we have cause for concern even greater.

artial History of
U.S. Federal Income Tax Rates
Since 1913
Applicable

Year income brackets

lowest Top source
bracket Source
1913-1915 -
1% 7% Census

1916 - 2% 15% Census

1917 2% 67% Census

1918 - 6% 73% Census

1919-1920
4% 73% Census

1921 - 4% 73% Census

1922 - 4% 56% Census

1923 - 3% 56% Census

1924 - 1.5% 46% Census

1925-1928 -
1.5% 25% Census

1929 - 0.375% 24% Census

1930-1931
1.125% 25% Census

1932-1933 -
4% 63% Census

1934-1935 -
4% 63% Census

1936-1939
4% 79% Census

1940 - 4.4% 81.1% Census

1941 - 10% 81% Census

1942-1943
19% 88% Census

1944-1945 23% 94% Census

1946-1947 19% 86.45% Census

1948-1949 16.6% 82.13% Census

1950 - 17.4% 84.36% Census

1951 - 20.4% 91% Census

1952-1953 - 22.2% 92% Census

1954-1963 - 20% 91% Census

1964 - 16% 77% Census

1965-1967 - 14% 70% Census

1968 - 14% 75.25% Census

1969 14% 77% Census

1970 - 14% 71.75% Census

1971-1981 (15 brackets)
14% 70% IRS

1982-1986 (12 brackets)
12% 50% IRS

1987 (5 brackets)
11% 33% IRS

1988-1990 (3 brackets)
5% 28% IRS

1991-1992 (3 brackets)
15% 31% IRS

1993-2000 (5 brackets)
15% 39.6% IRS

2001 (5 brackets)
15% 39.1% IRS

2002 (6 brackets)
10% 38.6% IRS

2003-2008 (6 brackets ) 10% 35% IRS

I thought that article was so compelling that I copied it to my document file and forgot to name the writer.......however, every word rings true. When you have two wars and CUT taxes rather than raise them, you end up with a deficit. Intelligent leaders in the past knew that. They also knew that it is not unusual for the wealthier income bracket to make money during war time while the middle and lower income brackets fight those wars, incur the hardships, physical and mental, along with their families. To stiff those who fought with higher taxes rather than the group that usually Makes money from wars doesn't seem 'cricket' somehow, now does it? Plus, it hurts the economy. People who live pretty much paycheck to paycheck (with some fortunate few who can save a few dollars) those are the ones who are likely spending in the USA for the everyday things they need to exist...that makes stores stay open and keeps jobs in the workforce. Cut that money, reduce the middle class and the economy slows down. Look at the years and the taxation, and then really think about how the average Joe and family were doing during those tax years and it will all come clear. Taxes DO matter. And so does who is taxed what!

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