How the Federal Government is Funded

It is constantly claimed that over half of the people in the US "pay no taxes." Although that IS the case when you look at federal income taxes (thanks to various tax credits and deductions), it's important to realize that 58.5% of total federal tax receipts come from other sources.

The 2 charts below show the current share of federal receipts by source compared to historical highs and lows as well as a visual representation of the distribution from 1934 to 2010.

What should be evident from the data is that although over half of the US pay no federal income taxes, EVERYONE pays payroll taxes (unless you make over $106,800, every dollar of which earned over that amount is payroll-tax free OR if you make your money from investment income, which is ironically called "unearned income"), which make up an almost identical share of total tax collections as federal income taxes (40% vs. 41.5%).

When you factor in the cap mentioned above, the poor and middle class pay a disproportionately large share of payroll taxes compared to the wealthy. So although the top 1% may pay 38% of all federal income taxes, they pay a much smaller share of payroll taxes.

The other important trend to notice is that the taxes on people (income and payroll taxes) are both near all time highs but those on business (corporate income taxes, excise taxes, and other) are all near all time lows.

Is it time for the pendulum to swing back in the other direction?

For reference:

• Payroll taxes are comprised of Social Security, Medicare, Disability, Unemployment, and other retirement/health insurance taxes
• Excise taxes are comprised of taxes on alcohol, tobacco, oil windfall profits, telephone, ozone depleting chemicals/products, transportation fuels, health insurance providers, indoor tanning services, medical devices
• Other taxes include Estate and Gift Taxes; Customs, Duties, and Fees; and other miscellaneous receipts

Data Source: White House Office of Management and Budget Historical Tables

Annual Borrowing Costs vs. National Debt

Although our national debt is massive in absolute terms ($14 trillion+), when compared to the size of our economy, it's still very manageable (93%). In fact, it's 30% lower than it was after WWII (which we grew ourselves out of without ANY cuts in government spending), when our debt ratio peaked at 122% in 1946.

According to government statistics, our annual borrowing costs are currently only 1.5% of GDP, near all-time lows. That is less than HALF of what it was when Reagan was president (3.1%). Viewed in these terms, how can anyone claim that we are in the midst of a national debt crisis?

In case you were curious what occurred in the early 1980's that caused our debt ratio and borrowing costs to spike, it happens to coincide with the Reagan tax cuts which dropped the top marginal rate from in the 70's to the upper 20's and our deficit exploded.

Source: White House Office of Management & Budget

More Tax Graphics

Tax History

Tax Day: The Reality of Class Warfare

As the Tea Party ramps up its Tax Day protests around the country, I'd like to introduce some facts and reality to the equation.

As the graph on the right shows (courtesy of the geniuses at WolframAlpha), the average federal tax rate in 2007 was 12.84%, a far cry from the 40% the median Tea Partier believes the rate to be.

The bar chart, however, paints an even more telling picture. How have the ultra wealthy (those making more than $2M annually) changed our tax system from PROgressive to REgressive? If this is proof of blatant class warfare, I don't know what is...

To quote Warren Buffett:

“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Also, as he said at a $4,600-a-seat Hillary Clinton fundraiser in 2007:

“The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

Is that the type of country we want America to be?

Socialism?

I put together the table below during the election campaign to show the Republican's hypocrisy at calling now-President Obama a "socialist" and implying that his entire economic agenda was to "spread the wealth around," when they themselves were the beneficiaries of Bush's spreading the wealth around over the previous 8 years. What it shows is the ratio between federal spending and taxes paid per state for 2005, according to the census data and compiled by The Tax Foundation (I added the color coding of green being net beneficiaries of a progressive tax code and red being the net contributors), and how that state voted in the 2004 and 2008 elections.

As the debate over a strong public option rages in Congress and Republicans (or conservative Democrats) again use phrases like "government take-over" and "socialized medicine," check to see what state they are from. Odds are, if it's coming from a Republican, they couldn't be more hypocritical of what government can do.

The picture above comes from Nate Silver's blog, FiveThirtyEight, and shows the relationship between Support for the Public Option and Insurance PAC Fundraising, further broken down by party affiliation. His graph came from some comprehensive, proprietary number crunching but he isn't usually that far off.

It's a sad commentary on our political system and an should be seen as an urgent call for campaign finance reform.

Health Care Surtax On The Wealthy

Many in the press have been talking about the "health care surtax on the wealthy" included in the Health Care legislation in the House, so I thought I'd throw in my two cents. Here is how the tax breaks down (even though, most are only quoting the top rate of 5.4% on millionaires):
The reason why I don't think that it's an unreasonable question to ask the top earners in the country to foot the bill for the rest of us is simple. The very same group of people were the direct recipients of the majority of the Bush tax cuts, which were never funded. Because of these tax cuts, the Citizens for Tax Justice estimates that this group of tax payers will have received around $700 billion by 2010. Compare that to the estimated $544 billion that these newly proposed taxes would raise over the next 10 years and the idea seems fair to me.

The California "Solution" Has Come To Seattle

Much like California did to close their budget shortfall, King County has decided to cut services that impact primarily the poorest among us to solve their own budget crisis.

Because a plan to give voters the option to raise the property tax in November was rejected 4 to 2 by the county Budget and Finance Committee, all King County general fund payments to things like homeless shelters, public health clinics and other programs for the needy will almost certainly be eliminated next year.

"Those services are going to go away," County Councilwoman Julia Patterson said. "That means people will go to the emergency room after they've waited until their situation is chronic and crucial. It means the health care costs will increase for all of us. It means people, children, seniors, people living in poverty in King County are going to get sick, and some people might die. So let's just be very honest about this. These decisions we're making impact peoples lives."

Another one of the tax increases that the Committee won't let us vote on? A sales tax increase of one-tenth of one cent to eventually raise $50 million annually. If it would save the county parks, shelters and health clinics, I'd vote yes on it.

California's "Solution"

It looks like the Governator has finally struck an agreement with the state government over California's $26 billion deficit. The deal reduced the deficit by $15 billion through decreased spending and increased borrowing, but would impose no new tax increases. Here's how they cut the spending:

• Cut nearly $6bn from schools and community colleges and close to $3bn from the state’s university system
• $1.3bn will be cut from Medi-Cal, the health program for low earners and the poor
• CalWorks, the state’s welfare-to-work program will have its funding cut by $528m, while Healthy Families, a program that provides health insurance for 930,000 low-income children, will be cut by $124m
• In-home support services program for the frail and disabled will have its funding slashed

And the most annoying of all the provisions:

• The agreement will clear the way for oil drilling to resume off the coast of Santa Barbara

According to the article this will "most likely intensify the social impact of the economic slump that is ravaging the state."

So not only will this specifically punish the most vulnerable in California, but also clears the way to resume oil drilling off of the coast? I feel horrible for Californians...

Total Cost of the Bailout?

I'll just copy and paste this story from Bloomberg, it's short and sweet:

July 20 (Bloomberg) -- U.S. taxpayers may be on the hook for as much as $23.7 trillion to bail out financial companies, according to Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

Barofsky made the estimate in testimony prepared for a congressional hearing tomorrow.

(emphasis added)