He notes that:
First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In the last year (2020), the gap is $1 trillion, again approaching a fifth: spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery. The message: there's a huge mismatch between Americans' desire for high government services and low taxes.
Second, almost $20 trillion of the $45.8 trillion of spending involves three programs—Social Security, Medicare (health insurance for those 65 and over), and Medicaid (health insurance for the poor).
Samuelson fails to make clear that Social Security and Medicare, which make up about $16 trillion of the spending, have their own dedictated payroll tax funding source. Not only do FICA and self-employment taxes cover the entire cost of Social Security and Medicare (with a combined distributional impact that is mildly progressive), these taxes generate a surplus that is used to fund other governmental programs, in exchange for which the federal government issues Treasury bonds earmarked for future Social Security and Medicare funding.
Looking At The Net Cost of Social Security, Medicare and Medicaid
The source of our budget woes look very different when you consider Social Security, Medicare and Medicaid were have integral funding sources other than federal general revenues attached to them. The net costs of these programs combined (calculated below) is about $3 trillion from 2011-2020. How does this change Samuelson's numbers?
First, from 2011 to 2020, the administration projects total federal spending of $27.8 trillion against taxes and receipts of $19.3 trillion. The $8.5 trillion deficit is almost a third of spending. All amounts assume a full economic recovery. The message: there's a huge mismatch between Americans' desire for high government services and low taxes.
Second, $2 trillion of the $28.8 trillion of spending involves three programs—Social Security, Medicare (health insurance for those 65 and over), and Medicaid (health insurance for the poor).
On a net basis, these big dollar programs represent about one-seventh of federal general fund spending over the next decade.
What Is Driving The Deficit?
How does proposed 2011 federal spending break out on a net of ear marked revenues basis?
Total: $2,276 billion
* Defense: $912 billion (including veteran's benefits and military retirements)
* Interest On The National Debt and Federal Employee Retirement Payments: $459 billion (including Social Security and Medicare Trust Fund interest payments)
* Income Security: $289 billion (e.g. SSI, Food Stamps)
* Net Social Security, Medicare and Medicaid Spending: $151 billion
* Education and Training: $122 billion
* Other Health Spending: $121 billion
* Transportation: $41 billion
* International Affairs: $65 billion
* Administration of Justice: $60 billion
* Other: $56 billion (includes natural resources, energy, agriculture, general science, general government operations, commerce and community development).
This break down also nets out unemployment insurance expenditures against earmarked FUTA payroll tax revenues, and nets out transportation spending against excise taxes ear marked for transportation.
In very round numbers, 40% of net spending is attributable to national defense, about 20% is attributable to past overspending, about 18% goes to help the poor and prepare people for employment, about 12% goes towards health care, and about 10% goes towards everything else.
Since we are stuck with past spending, the roughly one-third this spending that is driving the deficit comes entirely from the other 80%.
Basically, we have taxed ourself less lightly the necessary to pay for spending which is going towards, in roughly equal parts, spending on national defense and on spending to help the needy secure the necessities of life, education and health care. Medicare Parts B, C and D, and Medicaid are important parts of the second component. Social Security and Medicare Part A are not a drain on the budget at all.
The obvious solution does not include any major tinkering with Social Security or Medicare Part A. Instead, the obvious solution is some combination of tax increases, reduced defense spending, and cuts to programs to help the needy secure the necessities of life, education and health care.
Defense spending related to active wars is obviously problematic to cut, but a very large part of the defense budget has nothing to do with pending military action.
Given these options, increased taxes on those with an ability to pay is clearly more just than big cuts to programs to help the needy secure the necessities of life, education and health care. The only place were it seems plausible that there might be savings important enough to matter in the scheme of the larger budget is in efforts to control the rising costs of health care.
So, there you have it. My recommendations on how to deal with the deficit:
1. Increase tax revenue by about $740 billion a year, less the amount of any cuts that can be made in items two and three. As explained below, this probably boils down to about $640 billion a year in new tax revenue.
2. Cut defense spending in areas unrelated to pending wars. I would suggest that a $75 billion cut would be a reasonable starting point to attempt to secure.
3. Control federal health care costs. Total federal spending on health care (including Medicare Part A spending) is about $500 billion. I would suggest that a $25 billion cut would be a reasonable starting point to attempt to secure.
I also don't think it is important to close the deficit in a single year. A realistic plan to do so over three years might involve (with cuts and increases in each year relative to the baseline year, not cumulative):
Year One: Increase Revenue $220 billion, cut defense spending by $25 billion, cut federal health care cost by $5 billion.
Year Two: Increase Revenue By $440 billion, cut defense spending by $50 billion, cut federal health care costs by $15 billion.
Year Three: Increase Revenue By $640 billion, cut defense spending by $75 billion, cut federal health care costs by $25 billion.
Selective cuts elsewhere (e.g. farm subsidies) could reduce the need to raise more revenue.
Revenue Details
Where would the increased revenues come from? Mostly from cutting items described as "Tax Expenditures" (Table 19-1). Some big items, with their 2011 budget year dollar estimates include:
* Deferral of income from controlled foreign corporations: $34 billion
* Deferral taxes for financial firms on certain income earned overseas: $6 billion
* Inventory property sales source rules exception: $3 billion
* Graduated corporate income tax rates: $3 billion
* Capital gains tax rate preferences: $25 billion
* Step-up basis of capital gains at death: $25 billion
* Exclusion of interest on life insurance savings: $27 billion
* Tax free interest on housing and mortgage bonds: $2 billion
* Exception to the passive loss rule for rental losses: $10 billion
* Accelerated depreciation on rental housing: $14 billion
* New technology energy credit: $1 billion
* U.S. production activity deduction (Section 199): $18 billion
* 50% expensing of liquid fuels refinery equipment: $1 billion
* Excess of percentage over cost depletion: $2 billion
* Special Blue Cross/Blue Shield Deduction: $1 billion
* Additional deductions for the elderly and blind: $3 billion
* Energy production and investment credits: $1 billion
These would collectively raise $173 billion of 2011 year revenues.
Other tax revenue raising changes I would propose (not specically scored for cost):
Investment Income
* End the qualified small business stock capital gains tax rate preference.
* End preferrential tax rates for "qualified dividends."
* End graduated tax rates for the income taxed to trusts and estates.
* Lower the maximum amount that may be considered for pension contributions through employer plans, 401(k) plans, Keogh plans to include only income subject to full FICA taxation (or the self-employment tax equivalent), and further limiting this contribution to $10,000 per year (adjusted for inflation) for the benefit of any given employee.
* Cap combined contributions to employer plans, 401(k) plans, Keogh plans, IRAs, Roth IRAs, Education savings accounts, pre-paid tuition plans, medical savings accounts, HSAs and similar tax preferenced saving options to $15,000 per year (adjusted for inflation).
* End 1031 exchanges of real estate.
* Include otherwise tax exempt municipal bond income in excess of $250,000 a year in income.
* Reduce the charitable deduction allowed by the amount of any tax exempt municipal bond income of the person making the charitable deduction.
* Tax the passive investment income of otherwise tax exempt organizations in the same manner as Section 527 political organizations (i.e. reduced by connected expenses at the corporate tax rate in excess of a $100 exclusion), except where the sole purpose of the organization is to invest on behalf of others who can be taxed upon receipt of the income.
Personal Expenses
* Ending the mortgage interest deduction for second homes.
* Limit the mortgage interest deduction for first homes to $75,000 per year (adjusted for inflation).
* End the deduction for business meals and entertainment.
* Limit the deduction for first class travel expenses to 50%, or the documented cost of business class travel, whichever is greater.
* Limit the deduction for business lodging to $250 per person per day (adjusted for infliation).
* End the "parsonage allowance" exclusion from income
* Repeal the special hobby loss rule for horse racing.
Business Property Deductions
* Limit the cumulative depreciation/Section 197 deduction on property that is subject to a loan secured by a security interest to no more than the purchase price of the property less the outstanding principal balance on the loan at the end of the tax year in question.
* End depreciation of real estate.
* End inventory valuation on a LIFO basis for tax purposes.
Information Reporting
* Require payments to a non-corporate person, which would have to be reported on an information return such as Form 1099, to be reported on the same form if made to a corporation.
* Disallow business expenses of $600 or more not supported by a 1099.
* Require information reporting of all distributions (however characterized) to business owners or their spouses, and to lenders (in amounts more than $600 per year) from closely held entities.
* Disallow rental expenses for real property for which a complete address is not provided.
* Include on every individual income tax form: "Did you pay residential rent at any time during the year? If so, provide each address where you lived and paid rent for a month or more, during [year], if any." Index this information with Schedule E returns. Provide a $500 reward (per property, split if there are multiple reporting tenants, but in no case less than $50 per taxpayer) if this disclosure results in an increase in a landlord's income after an audit.
Non-Income Taxes
* Reinstate the estate tax at 2009 levels.
* Increase federal gasoline taxes to 40 cent per gallon from the current 18.4 cents per gallon to eliminate or nearly eliminate general fund expenditures for roads and bridges.
Calculating The Net Cost Of Social Security, Medicare and Medicaid
The Net Cost of Social Security
In 2008, the Social Security portion of payroll taxes (the Old-Age and Survivors and Disability components) exceeded disbursements by about $55 billion, before considering income of $18 billion from taxing Social Security benefits and $114 billion from interest on an accumulated $2,366 billion in the Social Security Trust fund. Social Security has drawn less than the taxes allocated in all but a few years since it was established. In 1980, one of the worst years in its history, it collected $3.5 billion less in taxes than it disbursed, and even in that year it was owed $2.4 billion in interest on the Treasury bonds held in its trust fund, for a net deficit.
Benefits from Social Security are paid to about 51.8 million people (as of May 2009). About 36.2 million of the beneficiaries are aged sixty-five or older. About 3 million are retired workers between the ages of sixty-two and sixty-five who received benefits early in exchange for a smaller monthly benefit payment. About 7.3 million beneficiaries are disabled. About 5.4 million are survivors or dependents of beneficiaries who are under the age of sixty-five (mostly spouses of retirees, disabled widows or widowers, spouses and children of disabled workers, and orphans).
On average, beneficiaries receive a positive, but low return on their payroll tax investment in the system. The return on investment is higher for lower income people, and lower for higher income people. The people least likely to receive a positive return on investment on their payroll tax investment are people with high incomes who never marry.
No other government program lifts more people out of poverty.
The Net Cost of Medicare (HI)
Medicare (Hospital Insurance) a.k.a. Medicare Part A, pays for a large portion of a few months of hospital care and post-hospital care. The beneficiary group overlaps neatly (but not quite precisely) with Social Security beneficiaries. The biggest difference is the Social Security early (i.e. pre-age sixty-five) retirees aren't entitled to Medicare.
The Medicare system (Hospital Insurance), is a bit more complicated in its financing than Social Security. It has both payroll tax funding, and premiums that are charged to participants, as well as interest on its trust fund that amounted to $17 billion on a trust fund balance of $319 billion in 2008, and earns money from the taxation of benefits to the tune of $12 billion in 2008.
There was a Medicare surplus, even excluding trust fund interest, that was invested in Treasury bonds and used to pay general fund obligations of the United States, every year from 1999-2007. In 2008, Medicare program revenues exclusive of interest and money from the taxation of benefits fell short of disbursements by about $29 billion, although after the interest payments and taxation of benefits, it was due on its trust fund Treasury bonds, the Medicare program's deficit was just $0.5 billion.
The Net Cost of Social Security and Medicare (HI)
Taken together, Social Security and Medicare Hospital Insurance programs generated $42 billion more in revenues than they disbursed in 2008, exclusive of trust fund interest and $30 billion of taxes on benefits. The combined Social Security and Medicare trust funds amount to $2,685 billion of Treasury bonds that generate an additional $131 billion in revenue.
The combined Social Security and Medicare program has generated more in revenues than they disbursed, exclusive of trust fund interest and taxation of benefits, in every year from 1990 to the present. In 1980, the combined system cost $4.4 billion exclusive of trust fund interest and taxes on benefits, and just $0.6 billion paid for with trust fund withdrawals after accounting for interest payments on trust fund balances earned, and this was promptly repaid to the trust funds for the system.
The Social Security portion of the system has in a quite stable track. It will start to need its trust fund interest to pay its expenses only starting in 2017 (i.e. not at all for the first seven years of the period Samuelson reviews), will not draw on Social Security Trust Fund prinicipal until 2025 (well after the period that Samuelson reviews) and will not exhaust the Social Security Trust Fund principal until some time in the 2042-2052 time period, depending upon the long term economic and actuarial assumptions used. Of course, even tweaks in benefits or payroll taxation could significantly extend these numbers.
Medicare Parts B and C
Medicare Part B is medical insurance, and Medicare Part C is a program in which people eligible for Medicare Part B get similar benefits provided through an HMO.
In 2008, the total premium revenue for Medicare Parts B and C was about $50 billion. Interest on the Medicare Part B and C Trust fund was about $3.5 billion in 2008, and had a balance of about $59 billion at year end. Benefits and administrative expenses for Medicare Parts B and C cost $183.3 billion in 2008.
The general fund expenditure cost of Medicare Part B and C benefits and administration exclusive of interest income was about $133.3 billion in 2008.
Medicare Parts B and C combined had 41.7 million beneficiaries in 2008 (3.2 million Medicare Part A beneficiaries did not participate in Medicare Parts B and C). The average benefit per beneficiary in 2008 was $4,322.
Medicare Part D
Medicare Part D, which started to operate in 2006, is a benefit that provides part of the cost of prescription drugs for participating Medicare beneficiaries, who pay a premium that averages $338 per year, depending upon the provider chosen. Medicare Part D provides an average benefit of $1,517 per beneficiary. There were 32.3 million Medicare Part D beneficiaries in 2008.
In 2008, the total benefit cost including costs of adminstration for Medicare Part D was $49.3 billion. This was funded with $5 billion in premiums, $7.1 billion in transfers from state governments, and $37.3 billion of federal general fund revenues. The state government contribution to Medicare Part D approximates a part of the Medicaid expenses that the states were relieved of by the Medicare Part D program.
SSI
The Supplemental Security Income program is a means tested federal welfare program funded out of the general fund budget for the "needy aged, blind and disabled." This program has about 7.6 million beneficiaries, mostly low income Social Security beneficiaries, at a cost of $49 billion dollars a year. The cost of the SSI program is less than the pre-interest/pre-benefit taxation amount of the Social Security program's surplus.
Samuelson's Social Security number doesn't include SSI, so we won't either, but it is linked to the Social Security program so I include it for completeness.
Medicaid
Medicaid accounts for about 17% of the combined expenditures for Social Security, SSI, Medicare and Medicaid. In the 2011 budget, that is about $149 billion of federal spending. The federal and state governments contribute roughly equal shares to the cost of the program.
Bottom Line
The bottom line breaks down roughly as follows:
Social Security and Medicare Part A:
* Net Federal Revenue $42 billion
* Taxes On Benefits Revenue $30 billion
* Trust Fund Interest Income $131
Medicare Parts B and C:
* Net Federal Revenue ($133.3 billion)
* Trust Fund Interest Income $3.5 billion
Medicare Part D
* Net Federal Revenue ($37.3 billion)
SSI (Not included in total, for informational purposes only).
* Net Federal Revenue ($49 billion)
Medicaid
* Net Federal Revenue ($149 billion)
Total Net Federal Cost (After Considering Trust Fund Interets Income And Taxes On Benefits, From Social Security, Medicare and Medicaid): $155.1 billion
The Total Net Revenue is about 10% of proposed total spending for 2011 on these programs. If one were to take 10% of the $20 trillion figure offered by Samuelson, you'd get $2 trillion.
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