Yesterday, as most Americans are painfully aware, was “Tax Day,” the last day for filing individual income taxes this year. When the smoke clears, Americans will have paid $1.6 trillion in individual income taxes. And contrary to the populist rhetoric of both the Left and the Right, the vast majority of those taxes will have been paid by the rich. The wealthiest 1 percent of Americans, who earn 16 percent of U.S. income, will pay roughly 43 percent of federal income taxes this year.
Of course, income taxes are only one component of federal taxes, and for most Americans, it’s not even the biggest part of their taxes. All in, Americans will pay $3.3 trillion in federal taxes this year. On top of that, they will pay $1.8 trillion in local and state taxes, for a total burden (local, state, and federal) of $5.2 trillion, roughly 30 percent of GDP. Americans will pay more in taxes this year than they will for food, clothing, and shelter combined.
Despite record tax revenue, the federal government will still run an $800 billion budget deficit this year. That’s because it will spend roughly $4.1 trillion this year, while taking in the aforementioned $3.3 trillion. This is not rocket science: If you spend more than you take in, you have a problem. Progressives will blame low taxes generally, and the recent GOP tax reform in particular. But the Congressional Budget Office says that tax revenues as a percent of GDP will decline by just 0.7 percent this year. Spending, on the other hand, will increase by 3 percent of GDP, more than four times as much.
Over the long term, the tax cuts will probably mean larger deficits. CBO estimates that forgone tax revenue will add about $1.85 trillion to the debt over a decade. Not good. On the other hand, increased spending will add around $12 trillion to the debt over ten years. Spending is expected to grow by 70 percent, meaning that even without the tax cuts, we would be drowning in red ink. Houston, we have a spending problem.
Where does that spending go? Despite complaints from conservatives, domestic discretionary spending (everything from the FBI to the FDA, the Department of Commerce to the Department of Education) accounts for just 16 percent of federal spending. Traditional subjects of conservative ire, such as foreign aid, amount to less than 1 percent of spending. At the same time, despite criticism from liberals, and even after the increases that Congress just approved, defense spending will be just 15 percent of federal spending. Obviously, every dollar counts, and the $143 billion in increased domestic and defense spending that Congress just passed is not going to be helpful.
Still, the big driver of federal spending remains entitlements, specifically Social Security (24 percent of federal spending), Medicare (17 percent), and Medicaid (9 percent). That’s half of all federal spending for just three programs. And the cost of all three programs is accelerating. A combination of an aging population and rising health‐care costs means that Medicare is expected to grow by as much as 7 percent per year, while Medicaid increases at a rate of 5.5 percent annually. Meanwhile, Social Security is expected to increase from 4.9 percent of GDP to 6 percent within a decade. The long‐term unfunded liabilities of these programs approach $80 trillion or more.
Quite simply, there is no way to balance the budget or seriously reduce spending without reforming these programs. Yet entitlements remain off‐limits on a bipartisan basis.
Congress’s answer to all this was to rush to the floor last week with a Balanced Budget Amendment to the U.S. Constitution. Predictably, the measure failed, but it did highlight the hypocrisy of a Congress that seems to embody St. Augustine’s prayer, “Oh Lord, make me chaste — but not yet.”
In the aftermath of Tax Day, millions of Americans are having to tighten their belts and realizing that they now have less money than they had before the government took its bite. Wouldn’t it be nice, though, if Congress did a little more belt‐tightening, and the American people had to do a little less?