Former Houston mayor and former U.S. deputy energy secretary Bill White explores in a Barron’s column the disconnect between the federal government’s revenue stream and its spending commitments.
The permanent hole in the federal-funds budget has become more obvious since the end of U.S. combat in Iraq and the reduction of most recession-related programs. According to the White House budget office, this fiscal year federal-funds spending on programs and interest on the debt will exceed federal-funds revenue by 40%. The average federal debt per household will soon exceed $140,000.
Income-tax revenue won’t rise fast enough to close the deficit. Because of international competition and the inherent capacity of multinational corporations to reinvest foreign earnings, corporate income-tax revenue has declined from 4% to 2% of national income since 1960. Personal income-tax revenue since 1960 has grown no faster than national income, with only slight variations above or below this year’s level — 8% of gross domestic product — despite numerous changes in tax laws and partisan power in Washington.
Meanwhile, the incomes of Americans with the skills and training to compete in the global economy have increased far faster than the rise in average income. In 2011, the 13.7 million taxpayers with adjusted gross income greater than $120,000 — the top 10% — paid 68% of all personal income-tax revenue; in 1980, the top 10% paid 49%. That shift in the burden of federal taxation does not mean, as Mitt Romney suggested, that the bottom 47% are “dependent on government.” It does signify that the federal-funds budget — covering a global security umbrella, most domestic programs, and all federal debt service — rests on a fairly narrow tax base. …
… Many Democrats now resist broad-based wage taxation, as reflected in President Barack Obama’s repeated vow not to raise taxes for taxpayers earning less than $250,000 and his acceptance of the use of debt to finance a two-year reduction in payroll taxation to fight the recession.
The Democrats’ first president, Thomas Jefferson, also sought to concentrate taxation on businesses and wealthy Americans. But in pursuit of that outcome, he imposed strict limits on spending and used surpluses to pay down debt. When leaving the White House, Jefferson expressed hope that “once liberated by the discharge of the public debt…the farmer will see his government supported, his children educated, and the face of his country made a paradise by contributions of the rich alone.”
A tax system based largely on the “contributions of the rich” may be desirable in the abstract, but it doesn’t pay for the level of spending now appropriated by Congress, much less the soaring costs of debt service and Medicare. Interest expense will rise sharply with higher interest rates and total debt. Meanwhile, Medicare costs will skyrocket. The population over 65 will increase from 40 million in 2010 to 80 million in 2030, and the number of those over 85 will triple.
Federal debt is now nine times greater than revenue legally available for debt service. The U.S. last maintained its debt at that high level in the 1790s.
In 2011, when calling on Congress to restore fiscal discipline, Obama wisely noted that “progressives have an obligation to show that the nation can afford the policies we espouse.” There is nothing progressive about federal spending that’s much higher than the revenue produced by the taxes that progressives embrace or that other Americans are willing to pay.
With his focus on the absence of sufficient revenue, White leaves unexplored another option for resolving the dilemma: scaling back government overspending.
