The Budget Deficit - More Truths

First Truth - Basic Math

Revenue - Expenses = Deficit
That's the basic equation.  Anytime the amount spent exceeds the amount received, you have a deficit. 

Second Truth - History

President Clinton was in the White House the last time we had a balanced budget.  That's a true statement.  President Clinton presided over four years of balanced budgets.  That's an almost true statement.  If you use accrual accounting, only three of those four years were balanced budgets.  Accrual accounting is where you book future liabilities in the year the commitment to pay them out in the future is made.

Before Clinton, the last President to even submit a balanced budget to the Congress was Richard M. Nixon in his final year in office.

Third Truth - Process

The President is required to submit his (or her) budget request to the Congress by no later than the first Monday in February.  Traditionally, since this became law in 1921, that is the day on which the budget is submitted.

Because the U.S. runs on a fiscal year that runs from October 1 through September 30, the Congress must complete the budget appropriations bills in time for the President to sign them before the new fiscal year begins.  Instead, what's been happening in recent years is that rather than passing the required bills, Congress keeps passing "continuing resolutions" that allow spending to continue, borrowing to continue by increasing the national debt ceiling, and in general the continued use of the no-limit "credit card" Congress issued itself in passing the authority to spend more than it takes in.

Fourth Truth - Entitlement and other Mandated Spending

Each year, spending for certain mandated programs, mostly entitlement programs must go on.  Welfare, food stamps, Social Security Retirement and Social Security Disability programs are just part of what gets spent.

Multi-year appropriations bills like Defense Department contracts to purchase airplanes, navy ships and so on continue each year.  New amounts are appropriated for the changes to these contracts brought about by overruns and amendments to the contracts.

Senator Bob Dole pointed out in January of 1981, just before President Reagan took his oath of office, that there was little in the budget that Reagan could alter because so much of the revenue pie was already committed for entitlements and other mandated spending.  Little has changed regarding that equation 30+ years later.

Fifth Truth - Solutions

Right now we're facing a budget deficit of over $1 trillion dollars per year.  With a population of 312 million, that means the government is borrowing more than $3,200 for every person in the nation, over and above all of the income, excise and other taxes we pay into the Federal goverment.  Just for the next year.

Republicans want to solve the problem by reducing the size of government, reducing spending and at the same time, cutting taxes which they claim will actually increase revenues.  We'll let economists with Ph.D.s argue whether or not tax cuts on the wealthy actually result in higher tax revenues, as opposed to such things being functions of improvement in the economy itself.  The crux here is the notion that you can just cut spending to resolve the budget deficit.

Next time you hear a Republican say we can solve the budget deficit by cutting spending, ask them where specifically they propose to cut, and how much.  Watch them squirm for an answer.  None of them have a good one.

Democrats, on the other hand, want to keep spending at present levels, and raise taxes to pay for them.  Here's the problem with that notion.  The top 10% of income earners take in somewhere between 11% to 15% of the total income in the U.S.  On that amount they pay roughly 70% of the federal income taxes paid. already.  But even if we taxed most of their income at 100%, it wouldn't raise nearly enough money to balance the budget.

The bottom 90% earn less than $40,000 per year on average.  As such they pay very little, if any, in income taxes.  But they earn around 50% of the total income earned.  So with half of the total income not being taxed, you can't raise taxes on the wealthy only to balance the budget.  Either these lower-income bands have to pay some taxes, or else you can't solve the problem.

The real solution is a combination of raising taxes, in particular, capital gains taxes.  Investment managers who get to take their compensation in capital gains rather than as ordinary income need to have that favorable tax treatment stopped.  We need to make other changes to the tax system.  A few examples.  If I bought 10,000 shares of stock at $5 per share and it's now worth $20 per share, I'd owe tax on my gain when I sold those shares and that gain would be $10,000 x $15 = $150,000.  But I can avoid that tax by donating those shares to a charity and I get to deduct $200,000 as a charitable contribution.  So my charity is costing Uncle Sam 15% (higher starting in 2013) x $150,000 or $22,500.  I'd like to see legislation proposed to force people who donate stocks forced to liquidate the position as part of the donation process, and pay the capital gains tax that would have otherwise been avoided.  I'd like to see charitable contributions for those earning more than $250,000 limited.  Right now they could donate up to 50% of their AGI in one year.  I think it should be 50% of the first $250,000, but only 30% of any amount that can be donated in excess of 50% of $250,000.  They would be allowed to actually donate 50% of their total income, but the amount in excess of 50% of the first $250,000 would only be deductible at 30%.  The remaining 20% disallowed deduction would carry forward to be deducted in future years against future income.

There are a lot of other tweaks that could be done to push the equation in the right direction.  But just cutting spending or just raising taxes won't solve the problem.