Summary

Washington's spending has recently been higher as a percentage of the nation's economic output than at any time since World War II. But by the same measure, Washington's revenues are the lowest in more than 60 years.

So does the U.S. have "a spending problem," as Republicans keep repeating in the current debate over how to reduce the nation's record deficits? Or is the problem that taxes are not high enough? Those questions frame a long-running partisan debate, and as usual we won't offer an opinion one way or the other. But for those seeking their own answers, we can offer some fiscal history and factual context.

Some key facts we think are worth considering:

Federal spending ("outlays" in budget jargon) is expected to equal 24.1 percent of the nation's gross domestic product in the current fiscal year, which ends Sept. 30. The figure was 25 percent in fiscal year 2009, highest since 1945.

On the other hand, federal revenues are expected to drop to 14.8 percent of GDP this year, lower even than the 14.9 percent attained in both 2009 and 2010. There has been only one year since World War II when revenues have been as low as in any of these years: 1950, when the figure was 14.4 percent.

These historically high rates of spending and low rates of taxation have combined to produce a chain of deficits that are also the highest since WWII. The deficit was 10.0 percent of GDP in fiscal 2009. It declined to 8.9 percent last year as the economy started to recover, but is projected to go up to over 9 percent this year. Each of these deficits is larger than in any year since 1945, measured as a percentage of GDP.

The U.S. is borrowing about 36 cents of every dollar spent so far this year. It borrowed 37 cents on the dollar last year, and 40 cents in fiscal 2009.

The largest components of federal spending are Social Security and Medicare programs for the elderly (33.5 percent of total outlays in 2010) and national defense (20.1 percent). Interest payments on the federal debt alone accounted for 5.7 percent of all federal spending, and that percentage is rising.

The federal income tax accounted for 41.5 percent of federal receipts in 2010 (down from 49.6 percent prior to the Bush tax cuts of 2001 – 2003). Corporate taxes brought in only 8.9 percent, also down sharply since the recent recession. Payroll taxes and other "social insurance" payments accounted for 40 percent of total receipts in 2010.



It's easy to argue one side or the other by just citing facts that support a particular view, and omitting others. In the Analysis that follows, we offer some graphics, details and documentation in an attempt to give our readers a quick look at the entire picture — both where the money goes, and where it comes from.

Analysis

A glance at this chart quickly puts our current fiscal mess in historical context. We created it using historical budget data from the federal Office of Management and Budget, updated with the most recent estimates of the current fiscal year's outlays and receipts from the nonpartisan Congressional Budget Office, issued June 22 as part of CBO's 2011 long-term budget outlook.

Not since the enormous effort required to defeat Nazi Germany and Japan in WWII has the gap between Washington's spending and its revenues been so large, as a portion of the economy. Then, taxes were increased sharply to pay for the war, but spending increased even faster. In recent years, Washington has increased spending while cutting taxes.

The current situation is a marked change from the booming 1990s. In those years revenues increased, due to a 1993 tax increase, which fell most heavily on those making more than $200,000 a year. Meanwhile spending decreased relative to the rapidly growing economy, partly because of an absolute decline in military spending following the collapse of the Soviet Union in 1991. Deficits were erased, and the government posted surpluses in fiscal 1998, 1999, 2000 and 2001.

But then a string of deficits began in the fiscal year 2002, and there is no end in sight. For the current year, the administration originally projected in February a deficit equal to 10.9 percent, a new postwar record. The Congressional Budget Office in April, using different economic assumptions, projected that enacting the president's budget would produce a deficit of 9.5 percent of GDP, and that making no changes to current law would result in a deficit of 9.3 percent of GDP.

What has produced these huge budget gaps? Tax cuts and wars have been big factors, as have recessions and expanded spending for health care in both Republican and Democratic administrations. For example:

Income-tax receipts are down sharply since the Bush tax cuts. In fiscal 2000, the year before the cuts began to take effect, receipts from the federal income tax on individuals amounted to 10.2 percent of GDP. That figure was down to 6.2 percent of GDP last year.

Spending for the military and for homeland security has risen substantially since the attacks of Sept. 11, 2001. Spending for national defense rose from 3.0 percent of GDP that year to 4.8 percent last year.

Non-military spending also has continued to rise. President George W. Bush pushed through an expensive prescription drug benefit for seniors in 2003, the largest expansion of Medicare in its history. In the financial crisis of 2008, Bush also pushed for and signed for a massive banking bailout. In early 2009, President Barack Obama pushed for and signed an expensive stimulus measure, and after a long fight in Congress he signed another expensive plan, the health care law, in March of last year, aimed at expanding coverage for millions who lack health insurance.

Two economic recessions have had their effect. The recession of 2001 began in March and lasted until November. And the worst downturn since the Great Depression began in December 2007 and continued until June 2009. In both cases unemployment remained high for long after business activity began to recover, holding back both wages and the taxes that jobless workers would have paid on them.

We won't attempt to assign blame to one party or the other for the deficits. There is plenty of blame to go around, some of which rests with an American public that won't accept cuts in the largest categories of public spending, and also resists tax increases on anybody but "the rich."

Where Does It Go?

The biggest share of federal spending now goes for Social Security (20.4 percent in 2010) and Medicare (13.1 percent), the two entitlement programs that big majorities of Americans want to protect from any reductions, according to a recent poll. Together these two programs for senior citizens consume more than one-third of spending, far more than national defense, which accounts for just 20.1 percent, despite the increases of recent years.

Some categories that are unpopular with much of the public turn out to represent a fairly small part of total spending. Foreign aid, for example, amounts to less than 1 percent of the entire budget — even counting in military assistance to Israel, Egypt, Iraq and Afghanistan. All agriculture programs — including farm subsidies — make up just over one-half of 1 percent.

Where Did It Go?

Major components of the $3.5 trillion spent in fiscal 2010 Social Security 20.4% National Defense 20.1% Medicare 13.1% Medicaid/CHIP 8.1% Interest 5.7% Low-Income Assistance 5.3% Unemployment Compensation 4.6% Education & Training 3.7% Federal Employee Retirement 3.5% Veterans 3.1% Transportation 2.7% Other health care 2.6% Parks & natural resources 1.3% Space/Science 0.9% Foreign aid 0.9% Agriculture 0.6% Everything else 3.5%

The wildly unpopular TARP program, used to finance banks, a big insurance company and two U.S. auto companies, is now actually bringing billions back into the Treasury, as old loans are repaid and government-owned stock is sold to the public. The nonprofit investigative project Pro Publica figures that $322 billion has now flowed back into the Treasury, of the $573 billion loaned, invested or spent originally. And even the Obama administration's $787 billion stimulus program, so excoriated by Republicans, has nearly run its course. It was enacted in 2009, and according to the official Recovery.gov website, had spent 84 percent of the total as of June 30. That included 90 percent of the tax benefits, 83 percent of entitlements, and 78 percent of contracts, grants and loans.

Borrowing 36 Cents on the Dollar

The current gap between tax revenue and congressionally approved spending is so great that so far this fiscal year the federal government has borrowed an average of 36 cents of every dollar paid out. According to the most recent "Monthly Budget Review," issued by the Congressional Budget Office on July 8, the total spent through the end of June (the first nine months of the current fiscal year) was estimated at $2.705 trillion. But government receipts fell $973 billion short of spending, CBO estimates.

The good news — if it can be called that — is that the huge deficit is running at $31 billion lower than last year at this time. Spending is higher (Medicaid is up 6 percent over last year, for example), but federal income tax receipts are running higher as well. CBO credited "higher wages and more employment" than last year for the increase in tax revenue. And borrowing 36 cents on the dollar is an improvement of sorts. For all of fiscal 2009, the deficit amounted to 40 cents of every dollar spent, and it was 37 cents in fiscal 2010.

Where the Money Comes From

Taxes make up the vast bulk of federal revenues, of course. Individual income-tax payers supplied 41.5 percent of all federal revenues in fiscal 2010, but Social Security and Medicare payroll taxes paid both by workers and their employers made up nearly as much. Combined with federal unemployment insurance taxes and a few others, these social insurance taxes made up 40 percent of revenues. The income tax on corporations brought in just under 9 percent, while excise taxes, on such things as gasoline and diesel fuel, alcoholic beverages and telecommunications services, brought in just over 3 percent.

We found a surprising bit of news buried in the "other" category, which made up 6.5 percent of all revenue.

Breakdown of "other" in 2010 (Percent of total revenues) Federal Reserve 3.5% Customs 1.2% Misc 1.0% Estate & Gift 0.9% Total "Other" 6.5%

It turns out that in 2010, more than half of that category came from profits made by the Federal Reserve System, whose lending operations expanded dramatically to address the financial crisis that started in 2007. The Fed's payments to the Treasury made up 3.5 percent of all federal revenue in 2010 — nearly $76 billion. The rest of the "other" category is made up of customs duties (1.2 percent of all revenue), federal estate and gift taxes (0.9 percent), and miscellaneous sources.

Who Pays?

Who pays all of these taxes? The best information on that comes from the Congressional Budget Office, which has tracked the tax burden for many years. The most recent complete data cover 2007. CBO figured in that year more than half of all federal taxes was paid by the top 10 percent of income earners. They paid 55 percent of all federal taxes in 2007, CBO said.

That's a comprehensive figure, counting the income tax, payroll taxes, excise taxes and even the corporate income tax (borne by stockholders in the form of reduced dividends and appreciation). And perhaps surprisingly, the top 10 percent of earners pay a greater share of federal taxes now than they did before the Bush tax cuts, which Democrats constantly criticize as a giveaway to "the rich." The top 10 percent paid 50 percent of all federal taxes in 2001.

However, that comes in spite of lower tax rates at the top, not because of it. The reason the most affluent 10 percent pay a greater share of taxes is that they are getting a greater share of all income. Their share of all pre-tax income went from 37.5 percent in 2001 to 42 percent in 2007.

One figure that gets a lot of attention is the percentage of individuals and married couples who pay zero federal income taxes. Those figures come from the nonpartisan Tax Policy Center. The TPC's most recent report was released June 14, and it shows that this year 46.4 percent of "tax units" (individuals or married couples) had zero federal income tax liability. That's because of various exemptions and tax credits aimed at reducing the income-tax burden on lower-income workers and families with children. The figure is down from 2008 and 2009, when the percentage topped out at 50.8 percent.

But practically all workers (and their employers) pay Medicare taxes on every dollar of wages, and Social Security taxes on every dollar of wages up to $106,800. Consequently, those who pay no federal income or payroll taxes at all amount to only 18.1 percent this year, the Tax Policy Center figures.

There's plenty more where these figures came from. We could focus more closely on what was paid and earned by the top 1 percent, for example. Or we could zoom in to examine the role of rising medical and drug costs in pushing up spending for Medicare and Medicaid. We may well visit those subjects in future articles. For now, we've tried to give a quick, accurate and balanced look at the big picture: Both where Washington spends, and where its money comes from.

— by Brooks Jackson

Sources

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Congressional Budget Office. "CBO's Long-Term Budget Outlook: Supplemental Data" 22 Jun 2011.

U.S. Congress, Joint Committee on Taxation, "Estimated Budget Effects of the Revenue Provisions of H.R. 2264. (The Omnibus Budget Reconciliation Act of 1993) As Agreed to by the Conferees" 4 Aug 1993.

Office of Management and Budget. "Fiscal 2012 Budget of the United States, Historical Tables: Table 2.3—Receipts by Source as Percentages of GDP: 1934–2016 " 14 Feb 2011.

Office of Management and Budget. "Fiscal 2012 Budget of the United States, Historical Tables: Table 3.1—Outlays by Superfunction and Function: 1940–2016" 14 Feb 2011.

Connolly, Ceci and Mike Allen "Medicare Drug Benefit May Cost $1.2 Trillion; Estimate Dwarfs Bush's Original Price Tag" Washington Post. 9 Feb 2005.

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National Bureau of Economic Research, "US Business Cycle Expansions and Contractions" undated. Accessed 15 Jul 2011.

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U.S. Department of State, "Foreign Assistance Budget" undated. Accessed 11 Jul 2011.

U.S. Treasury, "$1.7 Billion Additional TARP Funds Returned to Taxpayers, Positive Return on TARP Bank Programs Reaches $10 Billion" press release. 5 Jul 2011.

Pro Publica, "The State of the Bailout" undated. Accessed 11 Jul 2011.

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Congressional Budget Office, "Monthly Budget Review" 8 Jul 2011.

Congressional Budget Office, "Monthly Budget Review" 5 Nov 2010.

Office of Management and Budget. "Fiscal 2012 Budget of the United States, Historical Tables: Table 2.5—Composition of "Other Receipts": 1940–2016" 14 Feb 2011.

Board of Governors of the Federal Reserve System, "What does it mean that the Federal Reserve is 'independent within the government'?" 17 Jun 2010.

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