If you’re like me, you’ve been watching the news about the federal debt negotiations for weeks, thinking something smelled fishy but unsure what it was. On one hand, everyone agrees the national debt is too high. It makes sense, then, that spending must be cut sharply. That’s life. If you’ve spent yourself into a hole, stop spending.
On the other hand, it seems unfair, as President Obama argues, for all the sacrifice to come from low-income people who depend on the programs facing cuts. Somehow the wealthy should take some of the load. Unfortunately, you can’t balance budgets by cutting programs the affluent depend on, because they don’t depend on government programs. Shouldering their share, therefore, means paying more taxes. That is, opening their wallets to help the unfortunate. But generosity shouldn’t be coerced. If we’re in debt because of government programs we can’t afford, we just have to cut those programs, don’t we?
Besides, if you tax the rich more, they might stop creating all those great new jobs.
Well, imagine my shock when I stumbled across a website with the actual federal budget, courtesy of the Office of Management and Budget, and saw where the money really goes. You’ll want to be sitting down for this.
It turns out there has been no significant rise in federal spending as a percentage of Gross Domestic Product in a generation. To be precise, spending has floated up and down between 20% and 23.5% of GDP every year since 1975 (with a few exceptions that we’ll get to). That is, for every dollar earned in America, Washington spent 20 to 23.5 cents. The problem is, that’s more than the government took in. Revenues were only 17% to 19.6% of GDP. The difference was borrowed. Debt piled up. Now we owe $14 trillion.
What happened? Until 1974, government budgets were generally balanced for a quarter-century, right through the “big government” 1960s. Then, in 1975, the Arab oil embargo upended the economy. The Ford administration took emergency measures, lowering taxes and raising spending. The Carter administration began easing the deficit back down, a bit each year.
You know the next part. The Reagan administration took over and reversed policy. Instead of closing the deficit, it cut taxes and raised spending. The deficit exploded. We’ve been borrowing ever since, except for four years of balanced budgets under Bill Clinton. Now we’re busted.
But that’s not the crazy part. What’s shocking is which taxes went down and which spending went up.
Right now you’re thinking, well, duh, it’s Social Security and Medicare. They’re unsustainable. Americans are aging too fast. People are living too long (ponder that for a minute). How long can that last?
Quite a while, actually. Consider: Between 1960 and today, the number of workers needed to support each retiree fell from 5.1 to 2.9, a drop of 60%. During that same period our productivity — the amount each worker can produce per hour — rose by nearly 200%. Productivity growth slowed after 1980 — totaling some 45% — but the worker-retiree ratio has hardly budged, from 3.3 to 2.9. Sustaining Social Security isn’t harder than it used to be. It gets easier over time, because productivity grows faster than the senior population.
That is, it would be easier if the system received some of that increased productivity. But it doesn’t. Nor do the workers who do the producing. Nearly all of the gains have gone to the top 1% of the population. Back in 1980, the luckiest 1% was taking home 8.5% of all national income, according to IRS figures, while the bottom half of the nation divvied up about twice that, a princely 17.7%. By 2007, just before the crash, the shares were reversed: The happy few took home 23% of the total pie, while the bottom half got just 12.3%. Things got so nutty that the top one-tenth of 1%, just 300,000 individuals, got almost as much (11.9%) last year as the 150 million individuals in the bottom half. That’s where the money went: We donated it to the rich.
Here’s the craziest part. You’ve probably heard liberals complain that Reagan and Bush undermined government solvency by halving the top marginal tax rate, which is the percent that the richest Americans pay on each dollar they earn above a certain level. It was 70% throughout the high-growth 1960s. It’s just 35% today. You may also have heard the conservative reply: Because of other reforms, the wealthy still end up paying the lion’s share of taxes. The richest 1%, who earn 23% of all the income, pay 38% of all the income tax. The bottom half receives 12.5% of the income but pays under 3% of the income tax.
What they don’t tell you is that income tax is only part of the story, and a declining part. When Reagan took over in 1981, 47% of all federal revenue came from personal income taxes, 12.5% from corporate tax and 30% from the so-called payroll tax. (That last one is the special Social Security and Medicare tax, which hits everyone, rich or poor, with the same rate on every dollar they earn up to a given ceiling. Anything you earn above the ceiling is payroll-tax-free.) Today the government gets 43% from personal income tax and 7% from corporate tax. The payroll tax, the most regressive federal tax, provides 40% of all revenue.
The result has been a dramatic shift of the tax burden from the rich to the middle class and poor. In 1980, the bottom half of the population, with 17.7% of the nation’s income, paid 0.5% of all federal revenue. Today the bottom half takes home 12.25% of the income and provides 6% of revenues.
At the other end, the top 2% took home about 15% of all income in 1980 and paid about 48% of all revenue. Today, the top 2% takes home about 28% of income and pays 32% of revenue.
Finally, which spending has gone up? When Reagan first entered, he raised military spending. Over time that slowed down. Social Security? It’s stayed around 20% of the budget. Housing? Research? Parks? Minimal. Here’s what’s shot up: Medicare and Medicaid, from less than 7% of budget to about 20%. Recipients don’t visit the doctor more often, but the same visits cost more every year. Anything else going up? Yes: annual interest on the debt.
And there you have it: A monumental shift of income to the very rich from everyone else, and a quiet shift of the tax burden from the richest to everyone else. A gigantic hole in our Treasury. Some very rich job-creators. And jobs? Not so much.
You can see the sources of my numbers and check them out for yourself by going to this blog post at our Forward Thinking blog.
Contact J.J. Goldberg at email@example.com
Jonathan Jeremy “J.J.” Goldberg is editor-at-large of the Forward, where he served as editor in chief for seven years (2000-2007).