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Solutions: Taxes
Joseph J. Minarik
Committee for Economic Development
Why are we talking about taxes at all?
Why not just cut spending?
• The problem is just too large.
• Many want spending cuts only, but add,
“Don’t touch my Social Security and
Medicare.” Then, there is defense…
• Interest on the debt is a growing part of
the problem. But you can’t cut interest
independently; you need other savings to
reduce interest.
• Some believe that only cutting spending
would be unfair, or would harm the
economy (research, highways, etc.).
2009 Spending
Non-Defense
Discretionary:
$581
Defense:
$657
Medicare:
$425
2009 Revenues
Excise Taxes: $62
Corporate
Income Taxes:
$138
Other: $98
Social Insurance and
Retirement Receipts:
$891
Social
Security:
$678
Other Entitlements:
$990
Individual Income
Taxes:
$915
Deficit:
$1,413
Net Interest:
$187
Billions of Dollars
Source: Budget Historical Tables
2009 Spending
2009 Deficit
Only 11
percent
larger than
the deficit
Defense,
Medicare,
Social
Insurance, and
Interest: $1,946
Billions of Dollars
Other
Entitlements and
Non-Defense
Discretionary
Spending:
$1,571
Deficit:
$1,413
Source: Budget Historical Tables
But even “other” spending can be
important
• Veterans
• Transportation
• Administration of Social Security and
Medicare
• Law enforcement
• Education (including student loans)
• Medicaid (otherwise funded by the states)
Nondefense Appropriations
700
Billions of Dollars
600
500
400
Administration
of Justice
Other - 55
percent of total
300
200
Social Security
Medicare
100
0
Veterans
Benefits and
Services
Air
Transportation
Education
Ground
Transportation
“Other”
Entitlement
Spending
1,200
Billions of Dollars
1,000
800
Other - 58 percent
of total
600
400
Veterans Benefits
and Services
Unemployment
compensation
200
Medicaid
0
And even “other – other”
spending can be important
• When you have a tax question and you
call the IRS, do you want someone to
answer the phone?
• When you need a passport in a hurry, do
you want to stand in line?
• If you are a federal contractor, do you
want someone to cut your check?
• How do you feel about safe food and
water?
And the big kahuna: Aging.
• More elders means more Social Security
benefits.
• More elders means more Medicare cost –
even if we slow the rate of growth of
healthcare prices.
• And the growing population of “old-old” –
those 85 and over – means more
spending for long-term care.
Conclusions on Spending
• Do we need to cut spending? Absolutely.
We will need to take every dollar that isn’t
nailed down – and some that are.
• But cutting spending will be very hard –
not just “waste, fraud and abuse,” not just
foreign aid, or Congressional salaries, or
earmarks.
• So, can we solve the problem only with
spending cuts? No.
When looking at the deficit, and
from an international perspective,
three parts of the U.S. federal tax
system stand out:
• The corporate income tax – it has gotten
smaller;
• The Social Security / Medicare payroll tax
– it has gotten larger; and
• Taxes on consumption (excise taxes) –
they are much smaller than in other
countries.
Tax Revenues By Type Of Tax
100%
Excise Taxes
80%
60%
Payroll Tax
Other
Corporate Income Tax
40%
20%
Individual Income Tax
19
47
19
51
19
55
19
59
19
63
19
67
19
71
19
75
19
79
19
83
19
87
19
91
19
95
19
99
20
03
20
07
0%
Total Revenue
45
35
15 Major European Countries
30
25
United States
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
20
19
90
Percent of GDP
40
Individual Income Tax Revenue
13
15 Major European Countries
11
10
9
United States
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
8
19
90
Percent of GDP
12
Consumption Tax Revenue
14
15 Major European Countries
10
8
United States
6
4
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
2
19
90
Percent of GDP
12
Top Individual Statutory Rate
52%
50%
15 Major European Countries
48%
46%
44%
United States
42%
40%
38%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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an
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Au nd
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Be nds
lg
Sw ium
ed
en
Top Individual Statutory Rates
60%
50%
40%
30%
20%
10%
0%
Corporate Income Tax Revenue
5
3
2
United States
1
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
0
19
90
Percent of GDP
4
15 Major European Countries
Corporate Statutory Tax Rate
42%
40%
38%
United States
36%
34%
32%
30%
15 Major European Countries
28%
26%
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
24%
5%
0%
Japan
United States
France
Belgium
Germany
Spain
New Zealand
Mexico
Australia
Canada
Luxembourg
United Kingdom
Norway
Italy
Portugal
Sweden
Finland
Netherlands
Denmark
Austria
Korea
Greece
Switzerland
Turkey
Slovak Republic
Poland
Hungary
Czech Republic
Chile
Iceland
Ireland
Corporate Statutory Tax Rates
45%
40%
35%
30%
25%
20%
15%
10%
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
07
03
99
95
91
87
83
79
75
71
67
63
59
55
51
47
Corporate Tax “Effective Rate”
60%
55%
50%
45%
40%
35%
30%
25%
20%
2007
2004
2001
1998
1995
1992
1989
55%
1986
1983
1980
1977
1974
1971
1968
1965
30%
1962
1959
1956
1953
1950
1947
Corporate Effective
and Statutory Rates
60%
Statutory
50%
45%
40%
35%
Effective
25%
20%
Why Does This Happen?
“Tax Expenditures”
Tax Expenditures
(Percent of GDP)
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
†
20
14
†
20
12
†
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
5.0%
Conclusions
• There is no realistic way to solve the
budget problem without some new
revenues.
• We need to fix our corporate income tax.
• People want individual income tax
simplification and reform, too.
• We are out of step with the rest of the
world not to have a federal-level tax on
consumption.