The Federal Budget By Administration: Overview of Revenues and Debt

President Reagan wasn’t actually a great tax cutter, he was a great tax shifter, and his shift in the tax burden has remained in place ever since. A weak economy meant that President George HW Bush ended up with less personal income tax revenue despite breaking his “read my lips” tax pledge. President Clinton’s personal tax increases, concentrated at the top of the income distribution, really did increase tax revenues, because that’s where an increasing share of the nation’s income is going. The total federal tax burden, and the federal budget deficit, during the administration of President George W. Bush are different than in similar years of the administrations above. But W’s tax take and budget deficit are very similar to that under President Carter. With the exception of the Clinton Administration, all the additional payroll taxes to “save Social Security” since 1983 have already been spent, with IOUs deposited in federal accounts, and despite those additional revenues the amount of federal debt held by the public is 50% higher as a share of GDP than it was before the Reagan era. These are the findings when one tabulates federal revenues and expenditures as a share of GDP, for representative years of the last five Presidential Administrations, as I have in the attached spreadsheet.

The “Per $100K GDP” worksheet and “Simplified Per $100K GDP” worksheet are set up to print on 8 ½ by 11 inch paper. Looking at the latter, one finds that federal revenues totaled a near identical 18.1% in 1979, a representative year of the Carter Administration, and 1989, under Ronald Reagan’s last budget. But revenues from the individual income tax, which hits you harder the more you make, fell from 8.5% of GDP to 8.1% of GDP, and revenues from the corporate income tax fell from 2.6% of GDP to 1.9% of GDP. To make up for the cuts the payroll tax, which hits you harder the less you make, rose from 5.4% of GDP to 6.6% of GDP, as the payroll tax was increased to the 7.5% rate for both the employer and employee (and 15.0% for the self-employed) that it is today.

Although payroll tax rates didn’t change after Reagan, payroll tax revenues did change slightly. Because the 12.4% tax for Social Security (6.2% each) is only assessed up to a certain level of income (about $100,000 today), it’s share of GDP has fallen, because a higher and higher share of GDP has been form of investment earnings rather than wages, and a rising share of wages have been paid to those earning more than $100,000. The 2.9% Medicare hospital tax (1.45% each) ceased having a cap in 1994, and is now assessed from first dollar of income to the last. Medicare’s share of GDP rose during the George HW Bush and Clinton administration, but fell during the administration of George W. Bush, as more and more top earners took their work income in “profits” and “capital gains” rather than “wages” or “self employment income.” The higher payroll tax, and the ability of billionaires to disguise their guaranteed work earnings as returns from capital at risk, is one reason that Warren Buffet complains his secretary’s tax rate is higher than his.

The shift to compensation as profits, however, does seem to have boosted corporate income tax revenues as a share of GDP, from a low of 1.8% under George WH Bush to 2.7% under George W. Bush, higher than under Carter.

George I raised personal income tax rates to cut the budget deficit, but in FY 1993 personal income tax revenues were just 7.7% of personal income, down from 8.1% under the last Reagan budget. “Read my lips” indeed. President Clinton promised to solve the deficit problem by taxing those who had captured the benefits of the Reagan boom, and between a rising share of personal income being captured by the highest earners, and higher tax rates on those higher earners, federal personal income tax collections soared to 10.2% of GDP in 2000.

But Clinton didn’t just raise the top rates. He also undid the bipartisan tax reform of 1986, which had wiped out most deductions, exemptions and preferences in favor of just three (0, 15%, 28%) lower tax rates Clinton became popular by handing out one tax break, exemptions and preference after another, a strategy followed at the state and local level, it seems, by all our Mayors and Governors. A tax break for something, rather than direct spending on something, generally is worth more to you the more you make, unless and until you get nailed by the alternative minimum tax or tax break phase outs. So the biggest beneficiaries of the Clinton era tax breaks, aside from reversible credits like the Earned Income Tax credit (more on that later), are upper middle class professionals.

George II combined even breaks with lower rates, cutting personal income tax collections to just 7.9% of GDP, or lower than under Reagan. It is fair to say that W. reversed the Clinton tax increases. And the Clinton budget balance.

To understand the federal debt, understand that the federal government has been collecting extra taxes “for social security” and other trust proposes, and using the money for other things, depositing IOUs that someone will have to pay for later in the “trust funds.” In other words, the federal debt in the “trust funds” is money that future generations owe to Social Security recipients (and others) to make up for the extra money those recipients’ generation blew in the past. Under Carter in FY 1979 these “trust funds” totaled 7.4% of GDP, but thanks to all those additional payroll taxes they totaled 27.3% of GDP in fiscal 2006. That’s an extra 20% of GDP, and since the whole federal debt held by the general public in 1979 amounted to just 20% of GDP, if the rest of the federal debt had just broken even as a share of GDP, the share held by the public would have been paid off.

As it is, not only has the theoretical IOUs in the “trust funds” risen by 20% of GDP, but the federal debt held by the general public soared from 20.4% of GDP under Carter to 43.9% of GDP under George HW Bush. So not only were all the additional payroll tax collections “for Social Security” spent, in part to offset income tax cuts, but additional money was borrowed on top of that.

President Clinton did a double reversal, as the federal debt in the trust funds rose by 8.1% of GDP, but the federal debt held by the general public fell by a greater 14.4% of GDP. It was a little late, but if Clinton’s fiscal balance policies had continued, it might have been possible that my generation, at least, would have received the promised Social Security benefits.

Under George W. Bush, however, the federal debt held by the public rose only slightly through FY 2006 as a share of GDP, meaning all the additional payroll taxes “for Social Security” have been spent (but not much more until then). But watch the federal debt held by the public soar to the moon before W. leaves office if (when) we enter a recession.

Reagan cut income taxes in 1981, and then in 1983 a commission led by Alan Greenspan said we had to raise regressive payroll taxes to “save Social Security.” George W. Bush cut income personal taxes in 2001, and then said we had to cut benefits a second time to “save Social Security,” but that those who were “at and over 55” in 2005, those born before 1960, should not have to sacrifice anything.

But in a few more years, Social Security payments will come to exceed Social Security taxes, and it will be clear that Social Security has not been saved, and can no longer be saved, at least at current benefit levels, at least without future Americans paying a second time to make up for what was taken by those who came before, many of whom are still running things right now in both political parties. Call it the $3.4 trillion (and counting) heist. More on this later.

Finally, excise taxes don’t amount to a large share of federal revenue, but there is a reason federal “revenuers” don’t spend as much time going after moonshine anymore. Federal excise taxes on alcohol and tobacco are way down from what they were as a share of GDP, although states looking for “sin” revenues have presumably more than made up for it. Since beer is considered less sinful, or at least beer lobbyists more successful (most of the founding fathers brewed it!), the trend has been good for Busch.

I’ll discuss federal expenditures (without re-attaching the spreadsheet a second time0 in my next post.