Balancing the Federal Budget: Taxes

As mentioned in the introduction, federal tax revenues set a new record of $3.266 trillion in 2016. Unfortunately, this record is overshadowed by record spending and a deficit of nearly $600 billion.

The Problem

Complexity. Federal tax codes have become complex and burdensome to enforce, which allows certain individuals and corporations to take advantage of gray areas in an effort to avoid the burden of paying taxes.
How bad has it gotten? Below is a chart showing the number of “pages” in the CCH Standard Federal Tax Reporter from inception through 201339.
tax-code-complexity
The IRS estimates that, as of 2013, both individual and corporate taxpayers now spend up to seven billion hours working on tax paperwork, costing more than $165 billion39.

Composition. Tax burdens have shifted drastically. In 1950, federal tax revenues were about $291 billion42:

Individual Income Taxes: $116 billion (39.9%)
Payroll Taxes: $32 billion (11%)
Corporate Income Taxes: $77.1 billion (26.5%)
Excise Taxes: $55.7 billion (19.2%)

To compare, here is the percentage breakdown for 2016:
Individual Income Taxes: 48.8% (+8.9%)
Payroll Taxes: 32.9% (+21.9%)
Corporate Income Taxes: 8.8% (-17.7%)
Excise Taxes:2.9% (-16.3%)

tax-revenue-composition

Some of the increases can be explained. For example, the number of businesses falling under individual income taxes grew by more than 28% between the late 1990s and mid 2000s40. These include sole proprietorship and general partnerships.Payroll taxes have swelled for several reasons, one being several increases in the tax rate over the decades in part due to increased needs of social programs. The larger factor, in my opinion, is the massive growth of the workforce from 1950 to 2010 and beyond. Civilian labor force41:

1950: 62,208,000 (40.8% of total population)
1970: 82,771,000 (40.4%)
1990: 125,840,000 (50.3%)
2010: 157,695,000 (50.9%)

However, the payroll tax places additional burden on lower and middle class workers with Social Security tax payments maxing out at $118,50043. Additionally, non-pay benefits like stock options (except the difference between grant and market prices) are not subject to payroll taxes.

What about Corporate Income and Excise Taxes? The United States has the third highest top marginal tax rate at 38.9%, however effective tax rates have been estimated to be much lower – around 27.1% or .6% less than the average of 30 OECD nations44.

According to the U.S. Government Accountability Office, “in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability.” Ineed, 42.3% of large, profitable corporations with $10 million or more in assets paid no federal income tax in 2012. This phenomena is the result of tax deductions and the ability to carry forward past losses into future years45.

As for Excise Taxes, the massive reduction in revenues can partially be attributed to expired or repealed luxury taxes on passenger vehicles, boats, aircraft, jewelry, and furs. Environmental taxes have also dropped substantially with the expiration of multiple Superfund taxes.

Interestingly, while taxes that affect lower and middle class Americans have risen, taxes that are more likely to impact the wealthy have been repealed, allowed to expire, or have stayed at levels set decades ago46.

Possible Solutions

Eliminate tax loopholes and unnecessary complexity. 

Simplification of tax codes and eliminating loopholes would direct more funds directly from taxpayers to the federal government, save work hours, and reduce the effect of corporate lobbyists on tax legislation.

Projected Effects:

  • Reduction of billions of work hours currently required to prepare tax documents.
  • Reduction in costs for tax preparations of $165 billion.
  • Increased tax revenues of more than $100 billion.
  • Reduction in cost to operate IRS, which was $11.7 billion in 200947.
  • Re-balancing of tax revenue composition:
    • Individual Income Taxes: $1.5 trillion (47.7%, -1.1%)
    • Payroll Taxes: $986 billion (31.3%, -1.5%)
    • Corporate Income Taxes: $375 billion (11.9%, +3.1%)
    • Excise Taxes: $90 billion (2.9%, 0%)
  • Reduction of annual deficit of $217 billion.
Implement a Carbon Tax.
A carbon tax would promote development of environmentally friendly practices like renewable energies, reduction of carbon footprints and other pollutants, as well as increase revenues for the federal government.
Projected Effects:
  • Net increase of more than 20 million long term construction and operations jobs in renewable energy sector resulting in tax revenues increases of $304 billion or more.
  • Increased reliance on permanent investment and production tax credits for renewable energy of $40 billion.
  • Increase in tax revenues of $80 billion from carbon tax.
  • Reduction of annual deficit of $344 billion.

Conclusion

While GDP might suffer short term from tax reform and a carbon tax, with higher distribution of tax burden to corporations, the long term effects should be positive for the U.S. economy in terms of environmental friendliness, profitability, and employment opportunity.

Overall Projected Effects:

  • Creation of 20 million new tax paying jobs.
  • Tax revenue increases of $561 billion.
  • Budget surplus of $9 billion.

To conclude the Balancing the Federal Budget series I’ll be bringing together all of the expenses, incomes, and proposals in a summary. Coming soon.

References
41 Lee, Mather. 2008. Population Bulletin.
42 Graphiq. 2017. 2016 United States Budget.
43 Social Security Administration. 2016 Social Security Changes.
44. Americans for Tax Fairness. 2015. Fact Sheet: Corporate Tax Rates.
45 United States Government Accountability Office. Corporate Income Tax.
47 IRS. Operating costs.
Advertisements

2 thoughts on “Balancing the Federal Budget: Taxes

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s