After all that research and pretty detailed blog posts about federal spending, budget resolutions, and presidential candidates’ tax plans, it seems to be time for a break. We’ve hit intermission. It’s time to leave your seats, go out to the lobby, get a glass of wine or an IPA, and ask your partner, “Are you enjoying the show?” Or, since I am beginning this on Super Bowl Sunday, “What do you think of the game so far?” I’m not actually asking that question. I much prefer to write the posts that don’t require mind-numbing research.
I thought it might be time for a recap. My objective with this series is threefold:
1. To learn how the federal government receives and spends money & how that affects the economy,
2. To spread the message in easy to understand parts, and
3. To propose a solution for the country’s deficit problem.
That last one might be kind of hard. Also, I’m not sure I’ve been doing that good of a job on breaking the process into easy to understand parts. Hence, this summary.
Part I: Isn’t America Great?
Yes – the dollar is a reserve currency which lowers our interest rates about 0.5% and increases the chance of business success, the navy keeps international trade safe which reduces the cost of products around the world, we have clean air and water, wonderful cities, National Parks, excellent medical care, and so much more.
Parts II & III: What Republican Presidential Candidates Mean and Taxes, the Economy & Jobs
A review of the republican presidential candidates’ websites shows that, as a group, they consider the current tax system to be the biggest problem that detracts from America’s greatness, followed by the sluggish economic recovery and insufficient job growth. I have been exploring how the government collects and spends money, and the impact of tax policies on job creation or loss.
I came up with the following equation to estimate the net job growth that would result from changes to the federal tax code and spending:
Net Job Growth =
# Jobs Created by Individual Income Tax Cuts +
# Jobs Created by Business Tax Cuts –
# Jobs Lost from a Simplified Tax Code –
# Jobs Lost due to Federal Government Spending Cuts (to minimum government size) +
# Jobs Created by Increased State & Local Spending (transfers from federal gov.) –
# Jobs Lost to Inefficiencies in State/Local vs. Federal Management of Services +
# Jobs Created by Increased Social Security & Medicare Spending for Baby Boomers
When I came up with that equation on December 29, I had little idea of the time and effort needed to work all the way through. The 6 posts in this series since then have only partially worked on the 1st and 4th items on the right side of the equation. This is going to take a while.
Part III-A: Minimum Size of Federal Government
The Budget Process
1. The President submits his budget request to Congress in February for the fiscal year that begins on October 1;
2. Congress holds a hearing to question administration officials about the President’s proposed spending (not this year though – Congress’ way of expressing that the President’s input is not valued);
3. Each House of Congress develops and passes their own budget resolutions;
4. Select members of the House and Senate finance committees meet to hash out the differences between the two budget resolutions and come up with one that is acceptable to both chambers;
5. The House of Representatives and the Senate separately approve the joint budget resolution and a joint committee is charged with writing appropriations bills to authorize the discretionary spending;
6. The President signs the appropriations bills which then become law.
My Calculation for Minimum Government Size Based on Conservative Ideologies
I took the 2015 budget, added funds to national defense and cut other discretionary federal spending to arrive at a $3.65 trillion “minimum size of federal government” versus the 2015 actual spending of $3.626 trillion. That number was based on complete or substantial cuts in federal spending on science research, environmental protection and cleanup, foreign aid other than to Israel, housing & community, international peacekeeping, and many other programs. I did not include cuts in mandatory spending because that is based on previously passed laws and would require new laws to change the disbursements.
Part III-B: What Does the Congressionally Approved Budget Say for FY 2016?
Congress passed a budget resolution which promises to balance the budget in nine years. How?
1. Overestimate real GDP growth and inflation leading to higher revenue projections than the Congressional Budget Office indicates;
2. A bit of trickery (setting budget for Overseas Contingency Operations/War on Terror very low; spending in 2015 for Government-Wide Savings, but removing the forecasted reductions for 2016+);
Excluding spending from the budget that almost all expected to authorize (e.g., the Medicare Doctor Fix addressed at the end of 2015).
For FY 2016, Congress approved a budget of $3.8224 trillion in spending – a 5.4% increase versus the approved budget from the previous year. Discretionary spending is $1.1197 trillion and mandatory spending is $2.7027 trillion. The year-over-year increase is largely driven by Medicare, Transportation & Social Security. Approximately 10,000 Baby Boomers retire every day from now until 2030, so the budget will continue to grow.
Interlude: Budget Deficits and the National Debt
The federal budget deficit is the amount that the government spends minus the amount it receives in income. For fiscal year 2015, the deficit was $438.496 billion. Because of deferred taxes and increased spending approved by Congress and signed by the President at the end of December 2015, the deficit is expected to grow to $544 billion in fiscal year 2016.
The national debt is the total amount of money that the federal government owes to investors, that is, holders of treasury bonds or notes. There are two measures of national debt – gross federal debt and federal debt held by the public. Gross federal debt is the total difference between income and spending since the republic began. Some of that debt, however, is held in federal government accounts for specific uses, primarily Medicare and Social Security – that’s where your FICA withholding taxes go. When those balances are subtracted from the gross federal debt, you get the federal debt held by the public. At the end of FY 2015 on September 30, 2015, the debt held by the public was $13.117 trillion.
Part III-C: How Do Tax Cuts and Increases Affect Jobs and the Economy
In a scientific working paper with complicated math, Owen M. Zidar of the Booth School of Business at the University of Chicago reported that tax changes for the top 10% earners has statistically no impact on the economy or job creation/loss in the two years following the change. Tax changes for the bottom 90% earners, on the other hand, impact the economy and affect job growth or loss substantially. For a federal or state tax cut of 1% of a state’s GDP targeted at the bottom 90% earners, job growth is about 5% over the following two years.
Part D-1 & D-2: How Would the Presidential Candidates Tax Plans Affect Federal Revenue
I started with five hypothetical families with incomes of $14,250, $35,500, $63,300, $105,700 and $306,300. I used the 2014 TurboTax program to figure out the total taxes paid or refunded for each family and compared that to how each of the presidential candidates tax plans would affect the tax situation (except for Fiorina who has not put out a plan). Results (total change in federal taxes from these five families):
Clinton: $0 (0%)
Sanders: +$6,657 (+9.5%)
Bush: -$1,107 (-1.6%)
Carson: +$7,851 ((+11.2%)
Christie: -$8,081 (-11.5%)
Cruz: -$51,408 (-73.4%)
Kasich: -$12,195 (-17.4%)
Rubio: -$12,287 (-17.5%)
Trump: +$2,582 (+3.7%)
No candidate has put out a complete tax plan and I made some assumptions about adjustments, credits and brackets in order to perform the calculations.
That’s the summary of the work to date. I hope it’s easier to digest.