Thursday, October 25, 2012

Jimmy's Sobering Look at Budgets - Part 2



Me Knows Better Than to Say This… but I will.   Jimmy wants some answers to the US Budget.  This blog segment will focus only on the revenue side – TAXES - and what it will take to reduce the deficit.  This will surprise you – guaranteed. 

To review, my last blog tried to simplify the budget down to common proportions because with so many zeros it is easy to get confused wondering which zeros are Trillions or Billions and by that time we are desensitized to the enormity.   

I know some of you hate to look at analytical detail; therefore, I simplified key areas that have not been explained that well.  I did my own research directly from the government data and tried to see where it led me.   While I am not a financial professional, it doesn’t take an expert to look at these facts and come to a conclusion.  I hope the data is useful to get you informed about the debt and the over-hyped fake solutions no one has connected to fact.  Just look at the data and draw your own conclusion is all I ask.



Yearly Deficit:
Not that 2008 should be a comparison year since the economy imploded in the last 3 months skewing the data, but the deficit that year was $458 Billion – highest ever in our history (to that time).  But, I’ll use this as a base line for a “reasonable” deficit to try to make it easier to match.   Looking at the last 3 years (2009-11), we averaged over $1 Trillion dollars above what was then worst deficit on record and we have continued to do that for 3 consecutive years.  We will make it 4 consecutive years in 2012.  That means that our deficits have averaged over $1.4 Trillion per year with 2011 being the worst at $1.65 Trillion of over-spending.  Ouch.

Graphically, the red bars represent the new debt added each year.


Revenue:  Income to the government is down by an average of about $375 Billion for the last three years (see the bars on the right side of each graph) and the two biggest components are Individual Income Tax and Corporate Income Tax (I excluded Social Security – the light green bar which is supposed to be saved for later – which isn’t – but different topic). 


Now some might say, “Aha… we have a tax shortfall.  We need to increase tax revenue.”  Let’s remember that Tax rates were the generally the same during the last 10 years (remember the Bush Tax Cuts) so what happened?  If we had a recovery we should gain this $375 Billion back.


Number of Returns:
But here is one problem.  If we compare the number of tax returns filed for 2010 with those filed for 2009, there is a dramatic reduction in the number of filings.  Corporations (down 5%) and there are also 25% fewer millionaires with almost 10% fewer filings for those in the Top 5% income bracket – households over $200k.  The reduction of profits for large and small businesses and personal income to the individual filers resulted in a much smaller tax base for the government.  Bottom line – there are not enough people or corporations making money like they did before 2008.  As shown, the record year for receipts by the government was 2007 when it was $2.7 Trillion.  Then we dropped $375 Billion and have not recovered.  Business profits are lagging and so are taxable wages.  It looks like the health of the economy has a big affect on taxes received. 


First obvious conclusion:  If fewer people make money, then fewer taxes are paid.  Pretty simple.






But What About Higher Taxes?
Hey - I didn't didn’t answer the question.   Perhaps we should still raise taxes.  Next, let’s see what it would take in order to balance the budget.  I am not talking about paying off the debt – I’m just looking to reduce or eliminate the yearly deficit we are running each year.




Tax the Rich:
A solution most jump on is “Tax the Rich.  They still made money.”  Well, who are the rich and how much would it generate?  First let’s see from where all the taxes come.  Grouping the returns in 20% intervals (quintiles), it is not surprising given the progressive tax rates, that the top 20% pay about 70% of all the taxes to the federal government.  No surprise there.  So there has to be cash available to pay more.



Roughly calculated, this group paid in about $1.5 Trillion total.  Therefore, simply double their taxes to come close to a balanced budget (only need another $150 Billion after that balance).  Make them pay twice – elegant solution.  Oh… I forgot to mention - who are the top 20% wage earners?  They are the households making a little more than $120k before taxes.  So… we would Double their taxes and still come up short.  For a household making $120k gross per year, they would need to pay in an additional $15k after the first batch of taxes.  For a household making $250k they would need to pay another $49k.  I challenge everyone (no matter their income) to look at line 61 of last year’s 1040 tax return and ask, “Could I come up with that cash after I paid my taxes?”



Tax the Super Rich:
Double taxes for 65 million people - that sounds pretty steep and it doesn’t quite balance the budget.  How about if we just take it from the Top 1% - those bastards making over $1 million per year?  Well, there are 1.1 million households that fall into that category and they already pay about $388 Billion to the IRS.  Even if we took all of their remaining after tax income (essentially tax them at 100% rate), we would only gain about $1 Trillion, which is less than two thirds of the way to covering the 2011 deficit.  Think about that – we just took all the 2011 earnings of the millionaires (100%) and we couldn’t even get back to the 2008 levels of a $458 Billion deficit.   We would still have a deficit of $650 Billion.

OK, we need to drop down a little lower on the pay scale.  The next 4% (those poor suckers making over $200k per year) they have another $1 Trillion left after their taxes.  Therefore, luckily we don’t need to go down that far.  ALL we have to do is take ALL the income from ALL households making over $250k per year (including the millionaires).  And voila…  our total is about $1.6 Trillion – enough to cover one year of the deficit.  We only affect about 13 million Americans this way – take all the money they made for the year.  Majority rules… stick it to the rich guys.  Finally they are paying their fair share.  Whoever would think that Super Rich starts at a household making $250k per year?  I thought it was the “Millionaires and Billionaires” we were talking about.

Obvious Conclusion #2:  We can’t eliminate the deficit with just the earnings of Millionaires and Billionaires. 

Coincidentally, the administration keeps talking about those households over $250k and wants everyone to believe that the rich should start paying their “fair share.”  Is giving up 100% of a person’s earnings fair?  That’s what it would take to pay for the spending we currently are doing.

Obvious Conclusion #3:  Taking 100% of someone’s income is not “Their Fair Share.”

Therefore it appears, just to balance the yearly budget (eliminate the deficit) we would have to take 100% of the earnings EVERY year for those making over $250k.  Yikes.  Who would do that?


Tax the Evil Corporations:
OK, we can’t take it from just the rich people, but corporations have all sorts of money.  In 2010 the Fortune 500 companies had revenues (not profits… just sales) of $10.8 Trillion, but after paying wages (which get taxed later), dividends (which get taxed later), sales tax (local taxes), property tax, employment insurance (tax for unemployment), raw materials and finally federal taxes (at around 30%) they are left with about $708 Billion in profits… that should be… nope about a Trillion dollars short.  Those corporations would definitely leave the country or just incorporate overseas if there weren’t any way to make money here.


Wipe Out Capitalism:
OK – if we took all the money from just the millionaires ($1T) and all the money from the Fortune 500 companies ($0.7T) – we could balance the budget ($1.65T).  No more millionaires.  No more Corporations.  Sounds like Occupy Wall Street.  Life would be – Wait… everybody would be unemployed.  The economy would grind to a halt.  We would add another 26 million people to the bottom 20% quintile and around $260 Billion in lost income tax.  That’s not gonna work.   Those OWS guys should’ve stayed in school and learned math, then they could’ve been out doing something productive rather than camping out all summer… wasted their time complaining about the super rich and corporations.  Not enough money there to do what we need to do.


Tax Conclusion:
So, if/when the government decides to increase spending (which they do every year), then we need to drop a little lower into another income bracket and take ALL their money too just to keep balancing the yearly budget.  In a few years we could be taking everything from those making over $120k per year in the hopes of getting another $1.5 Trillion.  It doesn’t seem possible to increase government spending by another $1.5 Trillion per year, but this can be done with a budget growth of 9% per year for 4 straight years.  For those that say this isn’t possible, just look at the last 4 years and coincidentally, that is exactly what we averaged – 9% growth in spending per year. 

Therefore, by 2016, we could be taking ALL the earnings of the Top 20% of income earners in American – those households making over $120k per year.

Obvious Conclusion #4:  Washington – we have a problem.  There isn’t enough taxable income to sustain this spending.

Next, Jimmy will look at the spending side of the equation and dispel some myths about what we have been told.  We will see if that is the solution.










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