Making sense of federal budget Part II: RevenuesPublished 4:22pm Sunday, June 20, 2010
In last month’s Rhyme or Reason I focused on federal expenditures in the proposed budget. Now it’s time to talk revenues (taxes collected).
I offer no particular solution(s) to our budget and deficit challenge but it’s clear that it’s going to be a long, unpopular trek back to fiscal soundness in the U.S. We’ll need to change the way we look at taxes and the benefits of governance, if we’re going to come back from the brink.
When you look at the budget expenditures side of the equation, it’s fairly clear we have no realistic way of saving enough money to balance the budget. It will take a major increase in revenue or taxes, and no Sarah, there is not enough government waste to close the $1.3 trillion gap. That is not what any politician or government critic would ever admit.
We are now in a real life “Truth or Consequences” game and no one wants to hear the truth. We’d rather hear the fairy tales in the political ads or spouted by the political propagandists. I just hope you don’t believe that nonsense.
Just to review, the total proposed budget is $3.8 trillion or about 25% of Gross Domestic Product (GDP) with a total deficit of $1.3 trillion (8.3% of GDP).
Now where will the 2010 revenue be coming from? Here is a general breakdown:
* Income taxes (55%) $1.42 trillion
* Social insurance taxes (36%) $0.93 trillion
* Ad-valorem Taxes (6%) $0.14 trillion (includes excise, transportation & other)
* Business & other (3%) $0.08 trillion (all of this is Federal Reserve Deposits)
o TOTAL $2.57 trillion
Income taxes are paid by individuals and corporations which is what I am focusing on for this article. As a historical reference, the chart above shows some past numbers on income taxes.
The data essentially shows that corporations have been paying less and less percentage of the tax revenues for the last 50 years. U.S. corporations share of the tax burden is now 21% less than it was in 1960. The outcome has been that individuals are paying a larger proportion of the tax burden (86% or $936 billion) than at any time in recent history.
There are two ways at looking at corporate tax rates: Statutory and Actual.
I like the actual one because that is really what they pay, not the theoretical statutory rate which is devalued by loop holes and tax credits. As a percentage of GDP, U.S. corporations seem to be at the low end at around 1.8% as compared to the United Kingdom (2.9%), Canada (3.4%), France (2.9%), Netherlands (3.5%), Ireland (3.7%) and the winner, Luxembourg (8.6%).
Iceland (1.1%) and Germany (1%) come in lower than the U.S. but keep in mind that they both, like every other country, have value-added taxes (VAT) that aren’t counted as income tax.
Now let’s look at individual tax rates. And to keep it simple, let’s just look at the “Married, 2 kids” category. The U.S. rate is given as 11.9%. If you want to live in countries with lower rates you’ll have to move to Ireland (8.1%) or Iceland (11%).
The next highest rate relative to the U.S. is Luxembourg at 12.2% followed by New Zealand (14.5%), Korea (16.2%), Mexico (18.2%) and Switzerland (18.6%).
So you want to talk about “taxed to death”, the winner is Poland at 42.1% followed closely by Belgium at 40.3%.
The overall U.S. taxation level (Federal, state & local) compared with our GDP is approximately 28%. There are plenty of countries that pay less including Japan and Korea at around 27% and Mexico at around 8%. Middle Eastern countries have the lowest rates and they are all less than 5%. In a way, you could say that we are paying for their governance costs when we buy their oil.
Our neighbor, Canada, pays around 33% but it appears that about every other developed nation pays significantly more than the U.S. The winner in the developed world is Denmark at 50%.
What does all this tell us? Obviously, what we’ve been doing for the last 30 years is not working. We’ve all been told that lower corporate taxes would lead to healthier growth with a resultant increase in the amount of taxes paid into the Treasury. Well, I no longer believe that is so. You could easily conclude that U.S. corporations are not re-investing their tax incentives into ventures that generate taxable U.S. income.
Many of my friends and family are fond of saying “we are taxed to death.” I’d say that the people of Poland and Belgium are close to that honor but “We the People” of the U.S. can’t credibly make that complaint given our rank in the list of countries that clearly pay at higher rates.
It is time for us to re-think our old impressions and beliefs about governance. Taxes paid or tax credits given should be like investments that give a return in economic growth and raise the boat for everybody on board. The benefactors of current governance priorities are sinking the boat.
Rodney Gibson is the former Mayor of Saluda.