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The Doomed Budget Process

Robert Samuelson wrote explaining why the budget process is doomed to failure, no matter which party controls the process. The Left and the Right both have their pet ideas to solve the looming fiscal crisis, but neither side has viable solutions as everyone ignores the real budgetary issue.

In his article comparing spending in 1956 and 2006 he notes a few facts: In 1956 defense spending was 60%, while entitlements were 22%. In 2006 defense spending shrunk to 20%, while entitlements grew to 60%.

In fiscal 2006, the federal government spent almost $2.7 trillion. Social Security ($544 billion), Medicare ($374 billion) and Medicaid ($181 billion) dominated. There was $199 billion more for payments to the poor, including the earned income-tax credit and food stamps, among others.

It’s easy to get details Samuelson didn’t provide by looking in your 1040 tax instructions (page 83) for the pie chart titled “Outlays for Fiscal Year 2005” to yield the following fiscal facts regarding spending.

  • Social security, Medicare, and other retirement = 37%
  • Social programs = 20%
  • Physical, human, and community development = 10%
  • National defense,veterans, and foreign affairs = 24%

Social spending is 67%, defense is 24%, and the other 9% is interest on debt and general government. If someone wants to solve the debt and deficit spending you have to consider the largest items; strangely, Washington never does as Samuelson notes three popular solutions to the crisis.

  • Conservatives want to cut waste.
  • Liberals want to cut defense.
  • Liberals want to increase taxes on the rich.

Conservatives want to cut waste — Certainly waste exists, but it’s much too difficult politically to decrease spending, and even if it were possible to save 15% on programs, saving 15% on 33% of the budget doesn’t fix the problem. Being more efficient and eliminating waste is good, but fails to solve the crisis. Strike one.

Liberals want to cut defense — The myth of “defense spending is 50% of the budget” is already shredded by facts provided by the government (anyone claiming this myth is either misinformed or deliberately lying). Slashing defense by half would barely cover the deficit (according to Samuelson). Strike two.

Liberals want to increase taxes on the rich — How about “Soak the rich, they have to pay their fair share”? But taxes are already extremely progressive, as a CBO Paper in August 2004 titled Effective Federal Tax Rates Under Current Law, 2001-2014. On Table 2 (page 18 of the PDF) “Effective Federal Tax Rates” under “Share of Total Federal Tax Liabilities” heading shows in 2001 the following tax data:

  • The top 1% pay 22.7% of taxes.
  • The top 10% pay 50% of taxes.
  • The top 20% pay 65.3% of taxes.
  • The bottom 40% pay 6.1% of taxes.

To anyone who believes the rich don’t pay their fair share we ask, how much is enough? If the top 1% pay almost a quarter of the taxes, and the bottom 40% pay less than 10%, how much more progressive do you want taxation to be? How much more should the top pay? Or do you really desire socialist income re-distribution?

The rich are already “soaked”. Strike three.

The Republicrats in Washington can’t solve the problem because they ignore the real issue. The problem is entitlements — as our previous article on Social security and fiscal responsibility points out Federal Reserve Chairman Ben Bernanke stated to Congress “the economy could be gravely hurt if Social Security and Medicare aren’t revamped and urged lawmakers to tackle the nation’s thorny fiscal issues”.

So what will it be? Is the United States to become a socialist country? It’s up to the citizens to decide. If you believe in socialism, remember the words from the past about democracy:

It can only exist until the voters discover that they can vote themselves largess of the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. (The quote has been attributed to several people [Sir Alex Fraser Tytler and Alexis de Tocqueville], so if anyone has a definitive source please leave a comment.)

So where are we headed? Samuelson has an idea: if we at least call entitlements welfare, perhaps we can have a valid discussion on how to handle them.

It might help if Americans called welfare programs—current benefits for select populations, paid for by current taxes—by their proper name, rather than by the soothing (and misleading) labels of “entitlements” and “social insurance.” That way, we might ask ourselves who deserves welfare and why. We could consider all of federal spending and not just small bits of it. But most Americans don’t want to admit that they’re current or prospective welfare recipients. They prefer to think that they automatically deserve whatever they’ve been promised simply because they’ve been promised. They do not want to pose the basic questions, and their political leaders mirror that reluctance. This makes the welfare state immovable and the budget situation intractable.

Socialism and communism have failed everywhere they’ve been tried. As the major part of the budget is welfare spending and the United States heads for fiscal crisis, one question remains: Why would it work better here than everywhere else?

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