Where Do All The Taxes Go?

Have you ever found yourself at the end of the month with more bills than paycheck? Many Americans are in this situation. In fact, all Americans are in this situation if we take collective responsibility for how our government spends our tax dollars. In this election cycle the candidates are handing out plenty of goodies. The republicans are going to rebuild the military, while the democrats are going to increase spending on social programs. All of the candidates’ plans, except John Kasich’s, would increase government spending according to a study by the Committee for a Responsible Federal Budget. There has been a lot less talk about balancing the budget this cycle, and that is probably because there is little room to increase spending without raising taxes. That seems impossible these days.

From the White House 2016 Budget Proposal

Almost 70 percent of our federal spending goes to mandatory programs and interest on the national debt. Mandatory programs predominantly include Social Security, Medicare and Medicaid. Having nearly 70 percent of spending committed to things that can’t be changed is like having the cost of your housing and the interest on your credit card debt take up 70 percent of your income. If that were you’re budget you would feel pretty pinched. The kind of pinched where you have to choose between groceries and utilities. So it’s no wonder that we run an annual budget deficit. We spend 18 percent more than we make in tax revenues.

Overtime, as more and more people leave the workforce and enter retirement, those mandatory spending items will grow, like the Blob, eating everything in its path. The mandatory programs have a dedicated tax revenue source, but the tax revenues are now less than the costs of the programs.Ten years from now that portion of the budget dedicated to funding them will grow to nearly 80 percent. Our deficit will have increased by a third. In the process something will have to give. Spending on those non mandatory items like defending our country and maintaining our roads will grow by a scant 16 percent over the next ten years, while the mandatory portion will nearly double. The primary purpose of our tax dollars will be to support our aging population.

It is not only the federal budget that is weighed down by pension payments. Several states are in dire straights due to their pension obligations. Illinois, Kentucky, Pennsylvania and New Jersey are just a few. Detroit filed for bankruptcy when it couldn’t meet its pension obligations and debt payments. The growth in the near retired or retired population makes traditional pension systems unsustainable, and it is why most corporate pensions have been frozen or eliminated.

We simply can’t afford to do all of the things that we want to as a nation. Whether we’re social liberals and want to see more help for the poor or we’re conservatives who want to lower taxes and strengthen the military, there just isn’t any room under our current outlook for revenue.

What can be done? Well if it were you or me, I’d say we needed to move to a cheaper neighborhood to reduce our housing costs, but that isn’t an option for the country. There are some changes to social security and medicare that would reduce the pace of growth of the programs, but taking those very far probably won’t go down well. Many talk about reducing government waste, and I’m sure there is some of that, but how much could it be? Every large organization has waste. These are human endeavors, and we don’t always get things right. If we plan to realign our budget solely on the expense side, we’d need to seriously restructure. Maybe we’d lop off Florida (no offense to Floridians intended).

The fact is, we simply need more income. You or I could try to get a better paying job, but the government will have to raise taxes.The most likely place where we will see higher taxes will be those related to the mandatory programs. The Social Security Administration projects that by 2034 the required payroll tax rate to maintain the current benefit levels for Social Security will be 17 percent if no changes are made. Proposals for reforming the system include increasing taxes on high income workers and reducing the growth rate of benefits. But those changes would need to take effect soon to avoid more dramatic changes.

Better funding for the mandatory programs will certainly help, but there are many other programs that most would agree could use more funding or investment. Where will we get the money? Better economic growth would certainly help. Better growth produces more tax revenues. Unfortunately, with more of the population growing older, our demographics are working against robust growth.

Before we jump on any politician’s band wagon for spending increases or tax cuts, we need to understand where most of the money is going. Most of our budget goes to support our elderly and poor, and we certainly wouldn’t want to stop doing that. If we want to do anything else, we’ll have to be willing to pay for it, and that means paying higher taxes.

 Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net

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