Winning Progressive

(By the Pragmatic Pundit)

The deficit is determined by the amount of money the government spends and the amount of revenues it collects in taxes. Both income and revenue are affected by the state of the economy and both are affected by the tax and spending policies made in the federal budget process.

During difficult economic times, government spending automatically increases because of an increase in the number of people eligible for need-based programs like food stamps and unemployment benefits.  At the same time, tax revenues tend to decrease because fewer people are employed and therefore pay less in taxes. Corporations also earn less profit, and they too pay less in taxes.

Spending and Revenues

Spending can be divided into three groups:

Mandatory spending is what everyone calls “entitlement programs”. The amount of money spent is determined by how many people apply and are eligible for benefits.  So the increase or decrease in these programs is not determined by Congress, but largely by the state of the economy and population.  

Discretionary spending goes through an annual appropriations process  that allows Congress to increase or decrease spending in a given year.  The discretionary budget is usually around one-third of total federal spending.

Interest on the debt that the government pays on its accumulated debt.

 Revenues come from three major sources:

1.   Individual income taxes – 47 percent of tax revenues are spent during the annual appropriations process. More than 100 million American households file a federal tax return each year, making up the federal government’s single largest revenue source. While, the wealthy are meant to pay a larger percentage of their earnings than middle- or low-income earners,  this is not the way it works out.

2.   Payroll taxes – paid jointly by workers and employers become trust funds used to pay for specific programs like Social Security and Medicare.  Established as payroll deductions (FICA), employees and employers each pay 6.2 percent of wages into Social Security and 1.45 percent into Medicare. Clearly, Social Security and Medicare are not “entitlements”, but earned benefits. There is also a contribution for unemployment insurance.

3.   Corporate income taxes paid by businesses receive the same designation as income taxes paid by individuals. They pay a tax rate from 15 to 35 percent.

When you hear Republicans bellyaching about the effects of a tax increase on small businesses, keep in mind that the 35 percent rate applies to taxable income over $18.3 million.  Even then, the percentage varies because of  “loopholes” , deductions, tax credits and tax havens to avoid tax liability.

There are also smaller sources of revenue, like taxes on imports and taxes levied on specific goods, like gasoline. In 2011, individual income taxes made up 47% (there’s that 47 percent, again), while corporations contributed 7.8% of all federal tax revenues.

The Debt to GDP

Politicians, pundits and economist talk a lot about the debt to GDP or gross domestic product.  Simply put, it is a measure of the debt compared to the total output of the economy.  According to the CIA World Factbook, at the end of 2011 the United States had a public debt to GDP of  67.8%.

I concentrate on public debt because it includes Treasury securities held by investors outside the federal government; individuals, corporations, the Federal Reserve System and foreign, state and local governments. Think about that…67.8% of our debt is considered public debt, but only 47% of that total public debt is owned by international investors, which means foreign investors only really account for about 32% of our total indebtedness.  The rest is held by State and local governments, individuals and corporations.  I’m not even certain it should be called debt, but all other obligations are intra-government or debt the federal government has borrowed from itself . These are loans from surpluses  owned by trust funds, such as Social Security, Medicare and the Civil Service Retirement Trust Fund.

Confused?

One-third of the federal debt is held by our own federal accounts, while two-thirds is held by the public.  When you buy a Treasury bond, you are effectively loaning money to the federal government. There are many different kinds of Treasury bonds, but they all represent a loan to the U.S. government. The greatest percentage of our debt is actually money that we owe to ourselves!  What do you suppose would happen if the government failed to repay itself?  Would Treasury foreclose on the White House and repossess Air Force One?

When you include debt held in government accounts (Social Security, Medicare, etc.), the debt to GDP is approximately 105%.  In simple terms, our indebtedness exceeds the total worth of of our assets by 5%.  Don’t panic.  We’ve been here before.  After World War II in 1945, the debt to GDP reached 122.7%.  How did we overcome?  It didn’t require trimming expenditures, revamping Medicare or Social Security.  The answer was jobs.  People went to work…remember “Rosie the Riveter”?

For this weekend’s reading list we have articles on the impacts of voter suppression efforts, election victories for working families, Romney’s failed GOTV effort, how tax cuts provide little boost to economic growth, and George McGovern’s grassroots Presidential campaign in 1972.

A Victory Over Suppression - an essay on how last Tuesday’s election results demonstrated that the GOP’s voter suppression efforts failed to achieve their goal of stealing the election, but still hindered many people from exercising their right to vote.

What Election 2012 Means for America’s Working Families – a report from the AFSCME union detailing the significant victories that working families achieved at the federal, state, and local levels in the 2012 elections.

The Unmitigated Disaster Known as Project ORCA – a conservative blogger provides an insider account of the colossal failure that was the Romney campaign’s GOTV effort.

Multiple CRS Reports Show That Ending Tax Cuts for the Rich Will Not Harm Economic Growth - an overview of a series of studies from the non-partisan Congressional Research Service finding that reduced marginal tax rates and capital gains tax cuts have little correlation to economic growth, and that tax cuts are the least efficient policies for maintaining economic recovery.

McGovern ’72: An Oral History – insiders reflect on the grassroots Presidential campaign of George McGovern in 1972.

For this weekend’s reading list we have articles on the Chicago teachers strike, charter schools, tax rates and economic growth, social mobility, and taxpayer subsidies to professional sports teams.

Two Visions For Chicago’s Schools – education expert Diane Ravitch details the differences at stake in the Chicago teacher’s strike between the education “reformers’” strategy of charter schools, testing, and busting teacher’s unions, and teacher’s efforts to strengthen our public education system.  For an explanation from a Chicago teacher of why he is striking, check out this article.

Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 – a study by the non-partisan Congressional Research Service finds no correlation between the top marginal income tax rate or the capital gains tax rate and economic growth, but finds that the top tax rates are correlated with income inequality.

Promoting Social Mobility - a forum debating whether early childhood intervention can help reduce economic inequality and, if so, the best methods and programs for achieving such results.

Charter Schools: Finding Out the Facts – an overview of research regarding the performance of charter schools, which finds mixed results and that, on the whole, charter schools perform no better than the public school system.

In Stadium Building Spree, U.S. Taxpayers Lose $4 Billion – an accounting of how tax free municipal bonds used to finance the construction of a rash of new professional sports stadiums will cost U.S. taxpayers $4 billion while the value of professional teams has doubled over the past decade.