Taxes, Spending and the Federal Debt
I’ll warn you, this is kind of wonky, but it’s a national conversation that is LONG overdue.
Here are two tables excerpted from a 2011 CNN poll of American voters:
|
Share of the Federal Budget |
|
|
||
|
What We Think |
Actual 2010 Budget |
|
Keep Same or Increase |
|
| Military |
30% |
19.3% |
63% |
|
| Medicare |
20% |
13.1% |
87% |
|
| Social Security |
20% |
20.4% |
87% |
|
| Medicaid |
15% |
7.9% |
75% |
|
| Education |
10% |
2.7% |
85% |
|
| Foreign Aid |
10% |
0.6% |
37% |
|
| Government Pensions |
10% |
3.5% |
48% |
|
| Food Assistance |
10% |
2.8% |
72% |
|
| Housing Assistance |
7% |
1.7% |
72% |
|
| Public Broadcasting |
5% |
0.01% |
53% |
|
|
137% |
72.0% |
|||
The first two columns of numbers compare peoples’ perceptions of federal spending to the actual share of the budget. The last column shows whether people think that budget item should be increased or held steady.
If you look closely at this table, the public believes that relatively trivial federal expenses like public broadcasting and foreign aid make up a substantially larger share of the federal budget than they actually do. And these figures don’t even include things like the FBI, FAA, Homeland Security (and Border Patrol) or the interest on the federal debt which is sort of important. If we take the items from the table above that more than 60 percent of the people say “don’t touch”, and we add interest on the debt, that represents just shy of 76 percent of the federal budget.
In 2011, the federal government spent $3.6 trillion dollars, while taking in $2.2 trillion in tax revenues.
The table above indicates that more than 60% of Americans believe that the federal government should be spending AT LEAST (76 percent x $3.6 trillion =) $2.74 trillion, and hasn’t even begun to pay for a LOT of other services the government provides, such as law enforcement, highway maintenance, border security and safe air travel. In other words, we have a very bad case of unrealistic expectations.
As we go to the polls in the coming weeks, we need to ask ourselves if we are willing to either pony up extra taxes to pay for the things that most of us say are important, like Social Security, Medicare and defense, or if we are willing to consider the consequences of doing without these services. To put that decision into perspective, Congress agreed last year to cut federal spending in 2013 by about $109 billion. That’s a reduction of about 0.7 percent of Gross Domestic Product. According to one rule of thumb, that would result in somewhere around 700,000 lost jobs in 2013 across all sectors of the economy.
So far, neither presidential candidate has been terribly realistic. Raising taxes only on the wealthy doesn’t come close to balancing the budget, if that’s the goal. On the other hand, according to a 2012 study by the Congressional Research Service, cutting taxes has added to the deficit and has had no effect on economic growth while contributing to widening income and wealth inequality.
I don’t know what the right answer is, but I suspect that in the long run we will see higher taxes for everyone, as well as lower federal spending on social programs like Medicare and Social Security. But neither candidate is going to say that until after the election.
This column is prepared by Rick Brooks, CFA, CFP®. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.
Category: Business
