July 6, 1987 | Backgrounder on Federal Budget
591 July 6, 1987 NEW TAXES TO CUT THE DEFICIT= ANOTHER CONGRESS BAIT-AND-SWITCH RUSE Congress recently p assed a fiscal 1988 Budget Resolution that would raise federal taxes by $73 billion over the next three years. The $29 billion of additional revenue in 1988 would be the largest single-year peacetime tax hike in United States history. This same resolution , meanwhile, proposes to raise domestic spending by approximate1 $50 billion next year. And for the second straight year be cut by at least 2 percent in fiscal 19
88. Remarkably, despite raising taxes and cutting military spending, the Budget Resolution's bottom line deficit figure still misses the Gramm-Rudman-Hollings deficit targets enacted by Congress less than two years ago by almost $30 billion the only agency to feel t r; e budget knife is the Pentagon. Defense programs would In an attempt to win pu b lic support for the budget, especially for the tax increase contained in it, Democratic congressional leaders are trying to resuscitate three false but common myths about fiscal policy under the Reagan Administration Falling for these myths would allow th e liberals in Congress once again to pull their shabby bait-and-switch ruse-using fear of a deficit to get a tax hike and then using the new revenues not for deficit reduction but for new spending The bait-and-switch myths are Myth 1: Reagan's tax cuts lau n ched the country into an era of Sun, billion federal budget deficits Fact Despite the 1981 cut in marginal tax rates, federal revenues have not fallen. To the contrary. As predicted by the Administration, lower rates can generate higher revenues. Between 1 981 and 1987, federal tax revenues have grown by $160 billion in current dollars and $70 billion in constant dollars, adjusted for inflati0n.l Thanks to tax increases legislated during the Carter Administration however, taxes as a percentage of Gross Nati o nal Product (GNP) under Ron,ald Reagan have been. higher. than under any- of the last eight presidents with +e exception of Jimmy Carter. Moreover, legislated Social Security tax increases will push the percentage to record levels by 1990, even without th e new taxes proposed by Congress. What this means is 1) America is not undertaxed and 2) the Reagan tax cuts have not caused the deficits Myth 2 Reagans rebuilding of the US. arsenal has been exoesSme and i I dordable. I I Fact The average U.S. spending on defense as a percentage of GNP I between 1950 and 1980 was 8.4 percent. Today, the U.S. spends only 6.4 percent of GNP on defense. The new federal revenues generated since 1981 ,could .have paid for the entire defense hike with 55 billion left over to com l jatLfi5deFd??e& ink Myth 3 The Reagan A tion has sliced domestic- programs to be bone, leaving no more room for further budget cuts Fact spent $450 billion on domestic programs. Ronald Reagans latest budget $11 spend $600 billion on domestic programs. Rea g an has curtailed only the rate of growth in domestic spending; he has not stopped domestic spending growth Why did federal deficits erupt during the 1980s? Despite the claims by many lawmakers on Capitol Hill that the deficit is due to deep tax cuts, the f acts Ishow otherwise. As Figure 1 shows clearly, the cause of the deficitc.has4sbeen runaway Until Congress acts to curb the escalation in federal spending, tax hikes will ma e no dent in the deficit. The new taxes proposed by Congress will merely add mor e fuel to the spending fire Domestic spending has not been cut at all. Jimmy Carters las) budget I spendinf I IS AMERICA UNDERTAXED? I The conventional wisdom in Congress.that Reagan tax cuts have contributed to the budget deficit is contradicted by all th e evidence. By every meaningful measure the tax burden on Americans is heayier today A than in any 9. other period since World War
11. I 1 9 i In constant dollars, federal taxes have grown steadily bekeen 195Oand 1987 (see Figure 2 Since 1981 annual feder al revenues in constant dollark will I have risen by $70 billion by the end of this fiscal year Federal tax revenues as a share of gross national product (GNP) lare also at near record highs (see Figure 3 Of the, last nine presidential terms, only 1. Unle s s otherwise noted, the source of all numbers in this paper is: Office of Management and Budget of the Govt All dates in I I this pap- i 2Reagan CONGRESS'S HIDDEN TAX HIKES Washington's best kept secret is that, whether or not Congress this year, the tax b u rden on Americans as a percentage 'of GNP as constant dollar terms. will continue to mount at least through 1992 I I raises iaxes well as /in The reason for this is that previously enacted tax hikes have yet to kick iz. Next year, for instance, businesses and workers will be hit with a 5.8 ercent hike in the Spcial I 1988 alone than pushing for even more taxes, federal taxes as a percentage of GNP would climb to 19.4 percent by 1990 (see Figure 4 By that time, Americans will be carrying a heavier tax load t han during even the Carter years, which hold the record for taxing the nation. Figure 4 also shows projected taxes as a percentage of GNP between 1988 and 1991, assuming that the tm hike in the congressional Budget Resolution becomes law. By 1991 tax reve n ues would reach 20.2 percent Security pa 011 taxes. This will take $14 billion out o P the pockets of Americans in F I r 14 1 Thus even if Congress left the federal tax structure on automaticpilot;, rathir of GNP. Never in peacetime have taxes been so hig h . I 1 HOW CONGRESS USES SOCIAL SECURKY To UNDEWXATE THE I BUDGm DEFICIT I The federal budget contains over dozen programs of separate trust funds. The most important of these is Social programs also include highway, airport, and retirement trust believe-- erroneously--that tax contributions to these funds are set aside for these programs. Hence, gasoline tax money can only be used for road building, and.
Social Security for retirement. In fact, the funds are diverted immediately to other overnment programs, in return for government bonds which can later be cakhed nds permitting--from general revenues The trust funds are simply blended into the umfied budget, and thus any surplus in the funds serves to "cut" the deficit (see Figure 7 By 1990, for instance, t r ust fund surpluses will reach $135 billion; this revenue will help offset the budget deficit, mal&g'it appear to be only a pTojected $134 billion when the deficit in that year actually would be about $270 billion c I Securi trust fund. The temporary large surplus in the trust fund eventually will be neede a to pay off huge future liabilities as the baby-boom generation enters retirement. But Congress spends the surplus money to fund today's excessive spending on nonSocial Security programs. This could bank r upt the national, pension program when the federal government's IOUs eventually come due. The I Congressional Research Service has estimated that by the year 2020, the Social This accounting slight-of-hand could have serious implications for the Social 2. For a detailed explanation, see: Statement of Representative Harris'Fawell, March 12, 1987, pp. H1285, HB 3Securi dollarst? But if those past surpluses have been spent by Congress, there will be no money for the Social Security Administration to draw on t o pay retirees. qe CRS projects that if Congress at that time has to pay obligations directly out of gayroll taxes, lawmakers would have. to raise Social Security taxes by about 60 percynt over today's level.4 I Trust fund will have an accumulated paper su r plus of about $10 trillion consume over three and a half~~tim~s~mor~~,o GNIT..'than it did, as recently adding to labor costs, decreasing U.S. competitiveness and slowing down job creation 2 I I I I HOW IxlwER MARGINAL TAX RATES HAVE INCREASED TAX REVENUE How is it possible that federal tax receipts have reached record levels! despite the 1981 Kemp-Roth tax cuts, which reduced the average American's tax bill' by about 30 percent? The reason supply side" economists were correct.
Reductions in marginal tax r ates, the percentage paid on the last dollar eaTned have stimulated business expansion and job creation. This increased the tax base so much that even at lower rates the Treasury took in more revenue i YC# L.cw l+L Figure 5 shows the steady decline in the marginal tax rates 'on- various ,income groups between 1975 and 1988, when the tax rate reductions from the Tax Reform Act of 1986 will be fully in effect. The figure also reveals that Kemp-Roth cut tax rates across the board for all income groups. I I as 1960, n..:i y 3. David Koitz Social Security: Its Funding Outlook and Significance for Government Finance,"
Congressional Research Service, June 1, 1986, p. CRS-18 4. u, p. CRS-16 5. Bruce Bartlett A Tax Hike Is No Cure for the Deficit," Heritage Foundation Backerounder. No 491, March 3, 19
86. I 4- I DO THE AFFLUENT PAY A FAIR SHARE OF TAXES on the deficit since 1947.6 Its conclusion: k 4 2 i While the. House .of Representatives. leadership- long has. made the arpnent that the 1981 marginal tax cuts were a boon only to the rich, Figure 7 revekls that although the tax rates were made less progressive by the 1981 tax cuts, the: affluent now pay a larger share of total taxes than they did before the new tax rates were instituted. The wealthiest 5 percent of Americans now carry 5.5 percent more of the tax load than they did in 1981, while middle and lower income-Americans have had their tax burden eased by over 5 percent The notion promoted by Congress that the Reag'an Administration has slashed 6. Richard Ve d der, Lowell Gallawa and Christopher Frenze Federal Tax Increases and t4e Budget Deficit, 1947 1986: Some Empiri car Evidence Joint Economic Committee, 1987 5- I pork barrel spending measures--the Highway bill and the water bill--with a combined price tag 2 0 billion over the President's requesf l n 8 i I Stephen Moore Policy Analyst 6- I i. I Billions Figure 2 Growth in Federal Spending, Taxes, and Deficits Current Dollars 900 800 700 600 500 400 300 200 100 o Spending 4- Deficits b Tax Revenues 1950 1955 1 960 1965 1970 1975 1980 1985 Year NOTE: The federal budget deficits between 1950 and 1970 are too small to accurately represent on a graph of this scale. The largest deficit between 1950 and 1960 was 13 billion in 19
59. The largest deficit between 1960 and 1970 was $25 billion In 1968.
Figure2 I The Growth in Total Federal Tax Revenues Constant 1982 Dollars 900 800 700 600 500 400 Billions 300 200 100 0 1950 1955 1960 1965 1970 1975 1980 1985 1987 est Year Figure 3 Federal Taxes as a Percentage of GNP Dur ing the Past Nine Presidencies By Fiscal Years 20.0% T 19.3 19.0% 18.0 Percent 17.0% 16.0 15.0% 14.0% 13.0 12.0 ofGNP 1934-1946 1947-1953 1954-1961 1962-1964 1965-1969 1970-1974 1975-1977 1978-1981 1982-1988 Roosevelt Truman Eisenhower Kennedy Johnson Nix o n Ford Carter Reagan Fiscal Years Data for Fiscal Years 1987 and 1988 are OMB estimates. 20.0 19.0 18.0 17.0 Federal Revenues as Yo of GNP 16.0 15.0 14.0 Figure 4 Growth in Taxation Through 1990: Under Current Law and Under FY 1988 Congressional Budget Re s olution Federal tax revenues as a share of GNP 14.8 16.9 18.2 17.3 19.5 I 18.3 19.4 19.8 18.6 19.9 19.6 19.4 1950 1955 1960 1965 1970 1975 1980 1985 1988 1989 1990 Year est est e Actual Congressional Budget Office Projections With No New Taxes Proposed Co n gressional Budget Resolution Tax Increase Figure 5 1 .O Marginal Tax Rate Decline in Marginal Tax Rates Since 1975 Selected Years 100 90% 80 40,000 Income 10 209b 1 Social Security Tax as a Share of GNP 1975 1978 1980 1982 1984 1986 1988 Year Source: Tax Foundation, Incorporated Facts and Figures on Government Finance 1 986, table C-36 Figure 6 The Increasing Burden Of Social Security Taxes 8.0 7.0 6.0 5.0 4.0 3.0 2.0% c I.
Figure 7 Billions An 300 250 200 150 100 50 0 1980 1985 1990 (est Fiscal Year Repor ted Deficit (Includes Offsets for All Trust Funds Deficit Without Social SecurityTrust Fund Offset Actual Deficit (Excludes Offsets for All Trust Funds Figure 8 Share of Tax Burden by Income Group Before and After Reagan Tax Cuts I Wealthiest Top 5 Income Group 57.6 YO TOP 5-50 Bottom 50 0 Yo 20% 40 of Total Taxes Pald 60 d I i a Source: Internal Revenue Service, 1987 Data.
Figure 9 600 500 400 Billions 300 200 100 0 Federal Domestic Spending Versus Defense- Spending 1950-1985 Constant 1982 Dollars T b I 1 I Domestic Spending I I 1950 1955 1960 1965 1970 1975 1980 1985 Year I I a Domestic Spending is defined as total federal spending minus defense and interest on the national debt.
Figure 10 A Return to The Carter Era in Defense Spending Defense Spending as a Percentage of GNP 1 7-0?40 I 6.5 6.0% I Percent ofGNP 5.5 5.0 0 vo 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Fiscal Year I Defense spending figures for 1988 through1 99 0 assume adoption of 1988 Congressional Budget Resolution.