A Closer Look at the Federal Budget

Originally published in the September 2012 Intelligent Investor

 

Each year, Washington spends money to provide a variety of services. Ideally, Washington should only spend as much as it takes in so that no deficit is created. But of course this is pure fantasy.

The largest source of federal revenues comes from individuals in the form of federal income taxes and the payroll tax. In contrast, corporations add only a small amount of federal tax revenues to the budget.

For 2012, the federal government expects to bring in around $2.6 trillion in tax revenues. However, it also plans to spend around $3.7 trillion. Thus, the deficit of around $1.1 trillion will be added to the nation’s $16 trillion debt.

 

As the second chart shows, federal tax revenues as a percentage of GDP are at record-lows. 

At the same time, corporate profits are at record highs, while corporate tax revenues as a percentage of GDP are at a record low. Clearly, this presents a very big problem. 

When looking at the types of spending by Washington, it is most convenient to divide items based on whether they are mandatory (Social Security, Medicare, Medicaid and interest on the national debt) or discretionary.

As detailed first in America’s Financial Apocalypse, mandatory spending has been increasing for a variety of reasons (demographics and rising healthcare costs). However, in a few years mandatory spending will begin a much faster growth rate.

Now that Washington is fully aware of this mounting problem, they are looking for solutions in all of the wrong places.

 

Republicans and their hired guns (e.g. media pundits, economists and affiliated “think tanks” such as the Heritage Foundation) tell us that the entitlements are the big problem that threatens to bankrupt the United States. In addition, they claim that soaring spending for entitlements is causing the defense budget to shrink.

What they never mention is the fact that each year tax payers send nearly $2 trillion to Washington, much of which is supposed to be earmarked for entitlements. There are no tax payers I am aware of that send tax dollars to Washington earmarked for defense. 

Furthermore, these same individuals who wish to maintain America’s status as the world’s most vicious war machine never address reasons other than demographic variables that are contributing to the rising cost of entitlement programs, such as excessive healthcare inflation. 

As you can see, the majority of discretionary spending items are sent to the Department of Defense. This leaves less funding for critical programs such as R&D, NASA, infrastructure projects and so forth.

As the fiscal cliff approaches, defense lobbyists, the Israeli lobby and many other war mongers are calling for no cuts to defense spending.

Close to the entire amount paid in federal incomes taxes (excluding payroll taxes) is being spent on the defense budget.

Keep in mind that for the first time, the United States finds itself in a so-called war in which it has not raised taxes.

In fact, taxes were actually cut by the Bush and Obama administrations. 

This adds to the vulnerability of America’s fiscal picture.

 

 

 

Critics of entitlement programs (war mongers and their brainwashed puppets) claim that the defense budget is near a record-low as a percentage of GDP.

But who says that the defense budget should increase in proportion to the economy? 

Is war supposed to be a growth industry? 

 

 

When economists measure growth rates of various components of the economy, they frequently compare the raw dollar amounts to the GDP growth. This is done in order to determine which components are growing faster, slower or in pace with the growth of the overall economy.

It is logical to analyze the growth in spending relative to the growth in the overall economy for Social Security, Medicaid, Medicare, education, R&D, healthcare and other items because these segments make up vital components of the economy. They are resources required for growth and sustainability. However, defense spending does not fall into this category. 

Someone needs to provide this basic lesson in economics to Washington.