We’re Not That Far from a Balanced Budget

By Kevin D. Williamson

Tuesday, September 29, 2015

Americans are funny about taxes: When we complain about them, we don’t moan that we are paying too much — we lament that others are paying too little. In a Pew Research Center poll last year, only 27 percent of Americans cited their own tax liabilities among their complaints about the tax code, while 64 percent complained that other taxpayers — the wicked 1 percenters, the dreaded corporations — were getting off too easy.

If you’ve ever met anybody who believes that we can balance the budget by cutting foreign aid, that the Social Security “trust fund” is a real thing rather than a figure of speech, or who is a Trump enthusiast, you know that certain Americans are not about to let their minds be troubled by facts.

But here are the facts:

One, Americans earning $100,000 or more pay basically all of the federal income taxes, about 80 percent. That is far in excess of their portion of national income (“national income” being another thing that does not exist but which we are obliged to talk about), and they are only about 15 percent of all taxpayers. Households earning $250,000 or more, a tiny group (2.4 percent of taxpayers) pay about half of all federal income taxes, which is, again, disproportionate to their income relative to the rest of the population.

Two, wealthy people and corporations do not, in the main, benefit from arcane exclusions and sweetheart provisions in the tax code. As Josh Barro notes in his unimpressed analysis of Donald Trump’s tax plan in the New York Times, exemptions and deductions taken by those earning between $500,000 and $10 million a year add up to about 12 percent of their income. That figure is very much in line with the exemptions and deductions enjoyed by those with less exalted paychecks.

Third, populist rhetoric of the Trump-Sanders variety notwithstanding, hedge-fund managers do not in the main escape progressive taxation. Hedge-fund managers are generally compensated on a “2 and 20” model — they charge a 2 percent management fee on the assets invested with their funds and then a 20 percent performance fee on profits earned by their investors above a certain threshold. The 2 percent management fee is taxed as ordinary income, at the current top rate of just under 40 percent. For hedge-fund managers, much or all of that 20 percent is taxed as ordinary income, too, because hedge funds do not often hold investments long enough to qualify for the long-term capital-gains rate, currently 23.8 percent. Private-equity investors, which range from big, diverse outfits such as Bain Capital, where Mitt Romney earned his fortune, to Silicon Valley angel investors putting money into three-person startups, often do benefit from the lower long-term capital-gains rate, because they take large positions in companies, often acquiring them outright, and hold them for extended periods of time. Which is to say, because they are not the sort of short-term casino-capitalism speculators that stalk the popular imagination.

Fourth, people with moderate and low incomes often pay a lot more in federal tax than they know. All but the highest-earning 20 percent of U.S. households pay more in Social Security and Medicare taxes than they do in federal income taxes; adding insult to injury, the government lies to them about what these taxes are, pretending that they are “contributions” to retirement programs. They pay a lot of other federal taxes, too, on things such as gasoline and telephone services, that are not obvious to them. And of course they pay a lot of other people’s taxes, too, as their employers, landlords, butchers, bakers, and candlestick makers all endeavor to pass their own taxes on to their customers and employees in the form of higher prices and lower wages. You think your employer is paying “his part” of your payroll taxes out of his own pocket, or out of yours? But there is very little appetite for cutting those taxes, because of the myth that they support in some special way things such as Social Security and federal highways, and because there is no way to control tax-shifting by businesses and individuals.

At the moment, our national fiscal situation is considerably less bad than it was during the Obama-Pelosi-Reid era of one-party Democratic rule; the 2010 and 2011 federal deficits were 8.7 and 8.5 percent of GDP, respectively, but the 2014 deficit was only 2.8 percent of GDP. Federal spending went from 24.4 percent of GDP in 2009 to 20.3 percent in 2014, thanks in no small part to budget sequestration, the one national policy in which Washington’s Democrats and Washington’s Republicans are united in loathing. The 2017 deficit is projected to be 2.3 percent of GDP.

That puts us within striking distance of having a balanced budget (albeit one that is balanced at a spending point that is too high for my own taste) or at least the reduction of budget deficits to trivial levels. All that is needed to get there is a little sober reform on the taxing front and a little sober reform on the spending front, with the hardest piece being reform of our entitlement programs, which in the long run will be the major drivers of deficits. I like the idea of radical tax reform, scrapping the tax code, abolishing the IRS, and starting over, and then privatizing Social Security and abolishing Medicare and Medicaid to boot. But you don’t actually have to do that to balance the budget.

You do have to stop pretending that you can give the American middle class a big income-tax cut when it hardly pays any income taxes, and stop pretending that you can get spending under control without touching the tiny handful of popular programs (Social Security, Medicare, Medicaid, national security) that constitute the vast majority of federal spending. You don’t have to reinvent the wheel; you just have to cut federal spending from 21.4 percent of GDP to 19.1 percent a couple of years from now, and maybe reform the tax code with an eye toward making revenue meet spending halfway. That isn’t going to make everybody happy, but it isn’t landing on Omaha Beach, either.

Instead of working on that, we have an electorate that is, if the pollsters are to be believed, motivated by resentment, thinking it has been cheated, along with a populist Left that seems to believe that the richest society in human history is right on the edge of mass cannibalism and a populist Right that seems to believe that it is involved in an Elizabethan tragedy rather than an American political dispute.

Voters sometimes look around and wonder, “Who is going to be the adult in the room?” Fact is, it had better be you, citizen.