Revisiting the Deficit: 15% Left Over for You?

It’s hard to believe that Ross Perot’s heyday was 18 years ago. For those younger folks, Perot was the independent presidential candidate who used infomercials and charts to effectively communicate that the federal government was spending too much money.

Getting people to understand budget deficits, however, is usually quite a bit trickier. The Tax Foundation may have found a way with its new analysis. Some details below and a full link here, but the bottom line on erasing the current deficit: Instead of couples paying income tax rates that range from 10% to 35%, try these on for size — 24.3% to 84.9%. Translation: future generations are going to be paying the price for years and years to come.

At no point in the next ten years, according to the Obama Budget, will the deficit ever shrink to as little as 3 percent of GDP. According to the CBO (Congressional Budget Office), it will never even get as low as 4 percent. And the dire deficit predictions of reliable nonprofit groups like the Pew Trust and Peterson Foundation are even more alarming: the deficit won’t even shrink to 5.5 percent of GDP in their analysis.

‘Mind boggling’ is the term Martin Sullivan of Tax Analysts uses to describe the tax and spending changes that would have to occur just to get the deficit down to 3 percent of GDP.

"Our gridlocked, dysfunctional Congress simply cannot bring itself to absorb these types of painful shocks," says Sullivan. "Given these unprecedented pressures I believe that within the next decade there is more than a 50-50 chance there will be an upheaval either of the political system or the economy."

The trouble with political discourse about the deficit is that voters are often numb to the subject, and as a result, politicians are able to avoid the unpopular votes for cutting spending or raising taxes. Whether deficits are expressed in hundreds of billions of dollars or percentages of GDP, their importance is hard for leaders to convey or for the public to grasp.

But as big as deficits were back then (the early 1990s), they were never so huge that they couldn’t be remedied by holding down the rate of spending growth and adding a couple points to an income tax rate. Now, as the table below shows, that is out of the question. Even in 2012 or 2015 when the effects of the housing bubble and the fiscal stimulus have dissipated, the rate hikes required to balance the budget are unthinkable. 

Tax News: Good to Be Tied to Arkansas in This Case

Interesting numbers from the Tax Foundation, which is in the business of analyzing interesting (tax) numbers. Its annual review of what states did with their tax policies included some strong praise for Indiana. A few excerpts from the release and a link to the full study, which takes some to task for targeted tax hikes and accounting gimmicks (instead of reducing spending).

Nine states increased individual income tax rates (five states reduced their rates), six states raised general sales tax rates, 17 states increased excise taxes on cigarettes and five states increased rates of alcohol excise taxes.
“Two states – Arkansas and Indiana – managed to roll back spending growth commitments and take actions to limit spending, but other states have either kicked the budget can down the road or increased taxes,” said Tax Foundation Director of State Projects Joseph Henchman, who authored Tax Foundation Fiscal Fact No. 204, “A Review of Significant State Tax Changes During 2009.”  

“With state revenues declining due to the tough economic situation, most state leaders in 2009 have tapped high-income earners, smokers, out-of-state business transactions, or other targeted groups, those being the only people that politicians feel safe raising taxes on,” Henchman notes. 

California, Connecticut, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon and Wisconsin increased individual income tax rates. States that increased sales taxes include California, Massachusetts, Minnesota, Nevada, North Carolina and the District of Columbia.
Other miscellaneous tax changes in 2009 include obesity and soda taxes, excise taxes on plastic bags (often mischaracterized as “fees”) and “Amazon” taxes, which force out-of-state retailers to collect sales taxes from customers if the companies have affiliate and advertising relationships with in-state businesses.