My Problem Lies in Reconciling My Gross Habits With My Net Income

I've been trying to get a better handle on what the future economy might look like. So far I've only tackled the federal government portion. (Note that spending in this presentation is a measurement of flows, not contribution to final demand. Also, much of federal "spending" is actually programmatic transfers to the states, which in turn do the actual spending.)

This is roughly how federal government taxes and outlays broke down in 2007. On the tax side there are essentially two streams - taxes not dedicated to any program, and payroll taxes dedicated to senior assistance. Total tax revenue has not been enough to cover net current spending since 2001, thus the box on the right side showing the amount borrowed. Over on the spending side there are three big categories - general government (both discretionary and mandatory), Social Security, and Medicare. As we should all know by now, Social Security is running a surplus and the excess is being siphoned off to pay for the rest of government. Even with that surplus in hand, the federal government has been a net borrower since 2001. In contrast, the revenue for Medicare doesn't cover its total costs, and thus some general tax revenue is used to pay for what the payroll tax and premiums don't cover.

Anyone who says (net) taxes can be cut at this point is an idiot or a liar. Between the current budget deficit (1.2%), the "borrowing" from the Social Security Trust Fund (1.4%), and the inevitable increase in debt servicing to both the public and the SSTF we will see in the near future(>1.3%), there is a structural revenue shortfall of about 4% of GDP. Any new revenue for creating national healthcare system would be on top of the other increases. The proposal here would raise SS taxes slightly (0.3%), raise personal and corporate income taxes substantially (0.8%), return the estate tax to its pre-2000 levels (0.2%), implement a carbon and/or gas tax (1.5%) and create a whole new revenue stream for a healthcare system. I favor this approach on the merits, but I realize it won't fly - at least right now.

Here's an alternative that voters probably would not find to their liking. Convincing people trade a carbon tax for a payroll tax deduction probably wouldn't be too hard. But raising personal income taxes to 16% of GDP? Unlikely. Doable, but unlikely.