Understanding the Tax and Spend Big Government in Pictures

Mish

Let's take a look at spending and where the money comes from by income quintiles.

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

Peterson Federal Governmernt 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

Peterson Eight Popular Tax Provisions

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

US Debt Clock 2021-04-07

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 

Peterson Progreessive Tax System

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

Comments (55)
No. 1-21
simb555
simb555

Agree 100%. Great post, one of your best,

randocalrissian
randocalrissian

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.

TexasTim65
TexasTim65

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.

PecuniaNonOlet
PecuniaNonOlet

Great post. My father hated taxes and the one he hated the most was the social security tax. I asked him why he hated it and he said he would never see a dime of that money.

He started taking social security at 62 until he passed away at 79. He basically lived off that social security income for 17 years and received far more than he put into the system. Oh and he got free medical care too, used far more than he paid into.

As always, tax and spend is a complicated problem. Tell seniors you are going to cut medicare and social security and put on the ear plugs for the ensuing howls.

I do wonder how this whole thing will unravel eventually. Will the government default or will it pull a third world country move and seize pensions, 401k and such. Will social security become “needs” based screwing everyone that saved prudently?

Eddie_T
Eddie_T

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.

Casual_Observer
Casual_Observer

Tell me why debt matters and why debt cannot be monetized like it has been in Japan for well over 2 decades.

Misc
Misc

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.

LawrenceBird
LawrenceBird

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.

whirlaway
whirlaway

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.

whirlaway
whirlaway

"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.

Jojo
Jojo

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.

Sechel
Sechel

Why is the deficit a problem? As long as we borrow in our own currency it's not

Jojo
Jojo

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?

Sechel
Sechel

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

Mish
Mish

Editor

"The idea of refundable tax credits is a libertarian idea."

Total nonsense - Libertarians do not favor government redistribution of income

Mish
Mish

Editor

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

bluestone
bluestone

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.

Call_me_Al
Call_me_Al

"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.

Greenhead
Greenhead

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.

Japery Stone
Japery Stone

Serious question -- why do we need any federal income tax when we have QE and MMT?

Japery Stone
Japery Stone

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?


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