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If You Don't Want to Increase Revenues, Where Do You Want to Cut Spending?

January 18th, 2013
in Op Ed

by Paul Kasriel, The Econtrarian, former Chief Economist, The Northern Trust Company

The table below is from the September 2012 U.S. Treasury monthly statement. It shows by function Treasury receipts and outlays. I want to concentrate on the middle column, which shows Treasury receipts and outlays for fiscal year 2012. Total receipts in FY 2012 were $2,449.093 billion and total outlays were $3,538.446 billion, resulting in a budget deficit of $1,089.353 billion.

Follow up:

Let’s add up what was spent in FY 2012 on defense, veterans’ benefits/services, Social Security, Medicare and interest on the public debt. This sum, which I will call the untouchables, totals $2,272.563 billion. This sum, the untouchables, represents 64.2% of total outlays and 92.8% of total receipts. Let’s look at the untouchables in another way. Total revenues minus the untouchables amounted to $176.530 billion. Total outlays minus the untouchables amounted to $1,265.883 billion. So, assuming that the majority of American households does not want to cut spending on defense, veterans’ benefits, Social Security and Medicare and further assuming that the majority of American households views servicing the public debt as the long-run beneficial thing to do, there is not much left over of tax revenues to fund the other 35.8% of federal outlays. In FY 2012, “left over” tax revenues represented just 13.9% of residual outlays, i.e., total outlays minus the untouchables.

For the sake of argument, let’s assume that the following governmental functions were eliminated: expenditures on international affairs (e.g., foreign aid and defense of our foreign embassies), natural resource/environment (the EPA, ugh!), agriculture (who needs food inspectors?) and education/training/employment/social services (we don’t need those Washington bureaucrats telling us how to turn out world-class scholars in Mississippi). How much would the elimination of these functions saved in FY 2012? $197.853 billion. Let’s keep cutting. Let’s eliminate expenditures on science/space/technology, energy, transportation, community & regional development, justice and general government. What would this have saved us in FY 2012? $282.631 billion. So, eliminating all of this would have knocked $480.484 billion off the $1,265.883 billion of non-untouchable expenditures in FY 2012. Where’s the really big money in the non-untouchables category? Health (Medicaid) and income security (unemployment insurance), which totaled $888.934 billion.

So, the really big categories of federal spending are welfare to senior citizens regardless of their income and/or wealth, welfare to poor “junior citizens”, defense and servicing the public debt built up due to persistent federal budget deficits over the past decades. This is not to say that cutting federal spending by just one dollar is a wasted effort. But if one is serious about significant federal budget deficit reduction, one will have to get serious about cutting welfare for seniors, welfare for juniors and welfare for defense contractors. As I showed in a previous article, growth in total federal revenues in the past 10 fiscal years has been considerably below its long-run median growth. So, if one is serious about significant federal budget deficit reduction, one will have to get serious about raising more federal revenues – more revenues from households with incomes below $450,000. Keep in mind that with the passage of the American Tax Relief Act of 2012 (that’s what all the drama was about in Washington last week) and with the new taxes going into effect in this year associated with the Affordable Care Act, our federal tax rate schedule for individuals will now be more graduated (or, as some prefer to say, more progressive) than it has been in decades.

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