Governments Spending Problem
The Peter G. Peterson foundation has an excellent discussion on Understanding the Budget and Understanding Revenues.
Over the coming decades, there will be a growing structural mismatch between revenues and spending. That mismatch poses significant challenges for our budget, as well as our political system. Politically, it is always easier to cut taxes and increase spending than it is to raise taxes and cut spending. Yet addressing our growing debt will require policymakers to face those choices, and delay will make them even more difficult.
Debt vs Deficit
Every year the US spends more than it takes in. The lead chart shows a surplus in 2000 but it’s a mirage.
Every year national debt rises more than the alleged deficit because deficits ignore unfunded liabilities like Social Security.
Understanding Revenue
Income Tax Discussion
Income taxes account for half of government revenue.
“In 2019, the top quintile of earners paid 87 percent of all individual income taxes, while people in the lowest income quintiles had negative income tax liabilities (that is, on average, they received more in refundable tax credits than they owed in income taxes).“
Please read that again again until it sinks in.
Corporate Taxes
“In 2019, most corporate income was taxed at 21 percent at the federal level. When combined with state and local corporate taxes, the average statutory tax rate was 25.9 percent. Corporate taxes amount to approximately 7 percent of all tax revenues, or approximately 1 percent of GDP.”
For all the current brouhaha over corporate income taxes, those taxes only brought in 7% of government revenue (But please see my note below on payroll taxes for a better understanding of what’s really happening).
Tax hikes will bring in little additional revenue while encouraging more business flight to low-tax nations.
This is why Treasury Secretary Janet Yellen Seeks a Global Minimum Corporate Tax.
Payroll Taxes
Payroll taxes fund Social Security, Medicare, and unemployment insurance.
“For Social Security, employers and employees each contribute 6.2 percent of every paycheck, up to a maximum amount ($132,900 in 2019 and adjusted for average wage growth each year thereafter). For Medicare, employers and employees each contribute an additional 1.45 percent with no salary limit. The Affordable Care Act added another 0.9 percent in payroll taxes on earnings over $200,000 for individuals or $250,000 for couples. Employers also pay the federal unemployment tax, which finances state-run unemployment insurance programs. Total revenues from payroll taxes is approximately 6 percent of GDP.”
Corporations provide about half of payroll taxes. Effectively this is a tax on corporations that is not properly identified.
Looked at in this manner, corporations provide about 25% of federal government revenue, not 7%.
As a side note, the self-employed including me, fund unemployment programs but we are not generally eligible for benefits, with the Covid-recession the only exception.
Income Tax Exclusions
Income tax exclusions and tax deductions subtract from gross taxable income.
Interest paid on home mortgages is one such example. In reality, government has no business promoting one form of housing or another.
Eight popular exclusions account for nearly a trillion dollars in lost revenue.
US Debt Clock
The Debt Clock shows US debt is over $28 trillion.
Interest on national debt, even at these low rates, will top military spending as an expense item within a few years.
Progressive Taxes
The bottom 40% get more back income credits than they paid in.
The bottom 80% pay more in payroll taxes than they do income taxes.
If Congress truly wanted to offer a middleclass tax cut it would focus in this area.
Mish Proposal
Rather than revise the code, I suggest we scrap the code entirely and go to combination flat tax above a certain income level plus a national sales tax excluding food, medicine, and other essentials.
This would be more fair and less regressive than the current 6,550+- pages of tax code written by lobbyists primarily for the benefit of special interest groups and the wealthy.
The real problem however is spending. For starters, I would cut military spending in half and call it a start.
I would rather have spent trillions of dollars on infrastructure than wasted trillions of dollars in stupid Mideast wars.
The US cannot afford to be the world policeman and should not try.
Mish
Serious question — why do we even need federal income taxes when we have QE and MMT? Why take workers’ income when we have QE and MMT?
Serious question — why do we need any federal income tax when we have QE and MMT?
Because if we do go down the MMT road hyper inflation will result making everyone’s life from rich to poor horrific.
QE gives only a transitory boost but then as the debt becomes large with each new QE it drags on growth.
These programs will trash futures generations. Think about Venezuela.
Corporations provide about half of payroll taxes. Effectively this is a tax on corporations that is not properly identified.
Mish, it’s really a tax on the employee, not the employer as it is really part of the overall salary consideration to the individual employee. Regardless, it’s a big bite.
“Corporations provide about half of payroll taxes. Effectively this is a tax on corporations that is not properly identified.”
Disagree, as it would be more apt to say all of the payroll tax is effectively a tax on the worker. In the same way that an increase in tax/fee/expense on a company is said to be passed on to the consumer, this particular burden is passed on to the workers in the form of a wage that is 6.2% less than it could be. Half the tax is direct and half is indirect, but in the end that is 12.4% that is not in the worker’s pocket.
The government has been redistributing tax payers money to billionaires for years.
Looks like you picked a good day to do it. Beautiful up there.
Is the US the world’s policeman?
The middle east wars are about oil supply and the petrodollar sadly enough. Not really an attempt to keep the peace.
Spent the night camping at Toroweap on North Rim of Grand Canyon.
Rough drive. Just got back to a city all these posts today were scheduled
Nice. I’m jealous. Pics to follow?
“The idea of refundable tax credits is a libertarian idea.”
Total nonsense – Libertarians do not favor government redistribution of income
Economic systems are faith based systems for the most part. Once people lose faith in the system, it collapses. Right now the Federal Government is forecasted to run a deficit of about $3.1 trillion, and that is before Biden’s $1.9 trillion stimulus measures. The non-financial corporate sector of the economy is forecasted to go into an additional $1.2 trillion in debt. Our total economy is about $20 trillion per year. Add in some for the increase in household debt and state and municipal debt and a little more than a third of our economy is based simply on our ability to borrow additional money.
On top of this, as a country we’ve been running at an annual rate of over $1 trillion worth of capital gains income per year. That’s money that asset holders get for selling an asset for a price higher than they paid without any work being done on their part, It is like welfare for the rich. It really doesn’t matter the asset, just that it happens to a huge degree would befuddle people who work for their money.
Deciding who gets to benefit from borrowing the money is a tough decision.
I agree on no mortgage interest deduction but I think it’s asinine we tax interest on savings. As much as the flat tax appeals to me I see no possibility this gets enacted. Of course we need to allow deductions for medical expenses and someone else will say child care also deserves consideration. I’m sure there are other categories. Why not then consider scrapping the income tax in favor of a consumption tax which would promote savings. And our savings rate is way too low. A higher savings rate would solve having to borrow from foreigners or the government
Because TPTB don’t want people “saving”, they want everybody SPENDING so they can get higher GDP numbers.
Re: Mish Proposal
Agree but given that the probability of any/all of this happening at close to zero, what is plan B for the real world? Perhaps you should run for office?
Why is the deficit a problem? As long as we borrow in our own currency it’s not
Then why have any tax at all? Just borrow. Make sense.
according to MMT its to control inflation
It’s refreshing to have a president who isn’t kowtowing to the always vocal low tax/no spending cohort! Stuff needs to be fixed. Science needs money. I say sPEND, SPEND, SPEND! Let the Republicans clean up any mess WHEN/IF they manage to get control of Congress or the presidency in the future.
“For all the current brouhaha over corporate income taxes, those taxes only brought in 7% of government revenue …”
Silly argument. The “brouhaha” is BECAUSE of the fact that that number is so low. It used to be much higher in the 1950s, 60s and 70s. And corporations were paying their half of the SS and Medicare payments at that time too.
And it didn’t impoverish the US. We invented semiconductors, put a man on the moon and exported our goods all over the world.
At one time the U.S. was the producer to the world. That time does not exist any more. Quoting the 1950’s as if they were a permanent condition, when the economic condition moves in cycles, is a futile exercise.
Piketti thinks the top tax rate should be 80%. France raised it from 70 to 75%, resulting in some business owners moving to Belgium, as well as actor Gerard Depardieu moving to Russia. France then dropped the tax hike, as it proved to be counter productive.
The yellow vest movement came about from one tax too many, which ironically turned out to be a carbon tax.
It came about because of Reaganomics and associated so-called free trade policies that both the right-wing parties (D and R) implemented with gusto. Then they kept cutting taxes for the rich while selling the bogus argument that it would bring the jobs back. The Trump tax cuts of 2017 were just the latest in that series of scams on the American people.
JFK cut the top tax rate well before Reagan. The 1950’s top tax rate was already unsustainable, as our producer to the world status was already slipping, with Europe and Japan recovering from WW2.
The rate had to be trimmed a little perhaps, not all the way to the bone. Reagan started with a tax rate of 70 percent.
Taking ALL taxes into account (not just the US federal income taxes), we ALREADY have a flat tax system. The top 1% pay about the same as those in the 60-80 percentile, and in fact, a LOWER rate than those in the 80th percentile.
That’s what I figured. The top 20% may pay the bulk of the taxes but the top 0.1% probably pay no taxes.
Is that because of an income mix shift towards capital gains at the extreme upper end? I’d be interesting in seeing the source data for your chart.
Corporations (and individuals) paid more in the not very distant past and gasp.. the economy actually grew at like 3 or 4% a year. The give aways and corporate malfeasance created by the corp tax code is an abomination and has hurt not just the fiscal position of the US but also the competitive position.
The focus on individual marginal rates is a red herring. Few people pay close to that rate.
Where they do need to focus is on the estate tax issues. Get rid of the stepped up basis and make the payment of capital gains taxes apply to individuals, trusts, etc. NO tax safehaven. Never understood how if a parent sells stock the day before they die, they (or more likely, the estate) pays full capital gains tax. If sold the day after death, the estate pays nothing.
The Tax Foundation estimates that repealing the stepped-up basis rule would bring in $116 billion over 10 yrs, about $11.6B/year. As long as we ALSO zero out the $400-$460 billion over 10 yrs that we give in foreign aid, I’d back a stepped-up basis repeal.
The idea of refundable tax credits is a libertarian idea.
Instead of another government agency, just give people who need extra funds the money and let them allocate it.
Democrats knew that the libertarians would eventually call for stripping back the benefits as just more government spending.
Tell me why debt matters and why debt cannot be monetized like it has been in Japan for well over 2 decades.
Sure, Japan monetized debt.
What is the result?
An entire generation of older folks that are completely dependent on their children for survival. They live with their family, not just as a part of culture but out of necessity.
They cannot earn interest on anything. Also, the population is falling rapidly, as young adults aren’t having kids anymore, because they cannot take care of their parents AND their kids also. Since their parents already exist, the future generation is never produced.
Japan is royally screwed in the future.
We can do that here too!
I think we’re doing it already, as best I can tell.
Yes, we are. Immigration is the only reason the population is still growing.
Even then, immigration itself cannot last forever if other nations are going to start shrinking soon to, which they are, except for Africa.
I didn’t ask what the result was. Fundamentally, I don’t think it will happen here because there is a lot of wealth being passed on from one generation to the next. Culturally we are different than Japan where parents always depended on their children. This is part of Asian culture overall. And frankly speaking, the world doesn’t need any more people. Global population has nearly doubled in my 40+ years on the planet. I don’t think any of it is sustainable in the long run. The planet has already started revolting.
O, I agree depopulation to some degree will help things out environmentally.
HOwever, the transition is going to be awful.
And, US culture used to take care of grandparents too….we ceased doing that due to all that wealth you speak of. Grandparents gained their financial independence. Japan never had that generational wealth the US did. They are a very recent arrival to capitalism and were forced to be so by world events. They never got a chance to do what the US did until the 1970’s….and then the debt got monetized. Therefore, their culture never changed like ours did.
However, you asked what would happen if we monetized the debt, I answered.
Japan is just 40 years ahead of the curve.
Agree that we don’t need more people except that all economic models in the world today are built on the idea of ever more jobs with more people paying more taxes. The more taxes is critical because that is how social programs and government benefit programs get funded.
Unfortunately, the majority of people and politicians still think that jobs and labor participation will grow despite continual accelerating growth in robots and automation that will steal jobs from humans. And those robots don’t pay taxes.
This is why Japan is desperate for new births and has been offering benefits to couples that pop out new kiddies.
OT…anybody besides me resting WAY easier because Biden if going to outlaw ghost guns? LOL.
Is there even a single known instance of a mass shooter using a ghost gun? Are gangbangers turning out guns from 80% receivers now? I doubt it.
I could be wrong, but this looks a whole lot like a way to keep the far right paramilitary rabble from going into the gun business…disguised as something to increase public safety.
Given the capital was attacked on January 6th, I am not surprised if this was intended for paramilitary organizations. I do think the capitol will be get attacked again at some point this decade and the next time will be worse. And it won’t be foreign terrorists.
What’s considered income on your flat tax proposal? Is it just salary?
What about stock / real estate / collectible gains when you sell those things? What about business owners who have company cars/homes and other company stuff that isn’t personal income? Would there still be deferrals on 401K contributions?
There would still need to be a fairly complex tax code to deal with all the ways people actually generate wealth.
A flat tax takes care of all of those.
Especially if it’s a sales tax.
Money will eventually be spent. If not spent it is saved and loaned out to people who will spend it.
Wealth is never put in the ground, it is always used by someone who will spend it to produce some unit of GDP.
Flat taxes and sales taxes are both regressive……meaning they make poor people pay some small amount of tax instead of giving them more free sh*t….so I wouldn’t look for that to be embraced by the current generation of socialist idiot voters. Nor would I look for it to EVER become a reality.
It sure would be nice….but, nah…..it’s like believing in Santa Claus.o the e
Count me in as being opposed to spending half the revenue on the military….this is why we have the worst social safety net in the civilized world…pure and simple.
I do look for the US to become more isolationist…but the military is another humongous bureaucracy full of powerful players who get wha they want….so they will STILL screw the citizens and build more billion dollar bombers….look at who benefits there….tax those mothers…that’d be fine with me.
I agree with you on most, except the statement about the US having the worst safety net in the civilized world. That’s not actually true, the US actually has by far the BEST safety net in the world. No other nation comes close.
What the US does not have is universal health care. That is more than made up for other welfare systems the US does have, like child tax credits and the EIC which are so generous they blow away other nations safety nets.
If the poorest 20% of US citizens were a nation they’d be the 10th richest nation in the world, when government benefits are factored in.
The US has incredibly generous safety nets, far more than other nations.
Unemployment bennies are better in Europe, no?
Healthcare is the glaring failure…that’s what I was thinking about…..
It still depends on who pays the sales tax. Consumers or Businesses or both.
If it’s consumers, then any business owner can circumvent lots of taxes by buying via his business and paying no tax.
If it’s both, then items will skyrocket in price. Eg logger cuts a tree and sells to lumber yard. Add tax. Lumber yard sells to factory. Add tax. Factory makes furniture and sells to store. Add tax. Store sells to consumer. Add tax. You’ve taxed item 4 times. Imagine cars with thousands of components all being taxed many times over and items will be staggering in costs.
Imagine then competing with say China where all these intermediate steps are not taxed, just the final good in the store. See the problem. Or imagine 1 huge vertically integrated company that controls everything (trees, lumber yard, factory, store) and they only sell 1 time so only taxed once while small mom-pop places in my example have their costs way higher and can’t complete.
Both democrats and republicans love spending on the military, so good luck reducing it.
There’s no way they can raise enough tax revenue to balance the budget. And cutting spending on the military and/or gov’t employees in general will be a small drop in the bucket. I agree we spend too much on the military, but it provides a lot of jobs and a lot of the money gets recycled back in taxes.
The problem is entitlement spending. If that’s not addressed big time, there’s little point in doing anything else.
Entitlement spending in the USA is far and above the biggest problem facing the USA in spending.
We spend far far more than any other nation on earth on entitlement spending, and it’s going to bankrupt us.
Bingo bango, lining up to applaud the proposal at the end of this post. Unassailable from my vantage. I really like the nuance of flat tax over a specific income level to protect the lowest tranche from tax burden. Also cutting military spending, which is simply insane. F-35s.
Agree 100%. Great post, one of your best,