The U.S. 2013 Budget Debate in Washington: Alarming National Debt & Deficit Facts– Impact on Competitiveness, Social Programs, Quality of Life…

Whether they run a record company or a grocery store, every boss will tell you you’re in big trouble if you’re borrowing more than you can ever afford to pay back. Delaying the pain for future generations is suicidal. We’ve got to start getting the deficit down right now, not next year ~Simon Cowell

‘National debt’ and ‘national deficit’ are tossed around – often interchangeably – and confuse rather than clarify an understanding of the U.S.’s ‘national debt’ status.  In simplest terms, the federal budget is the amount of money set aside to finance government’s operation for one fiscal year. The budget can be viewed as a two column sheet. One column represents the revenue collected to finance the budget’s expenses.

The second column represents the expenditures the government makes. Ideally, at the end of the year there should be more money left in the surplus column, or revenue exceeded expenditures. At least, revenue should equal expenditures for a ‘balanced’ budget. Unfortunately, during the past decade expenditures have exceeded revenue to create deficits.

A ‘national deficit’ or ‘budget deficit’ is considered part of the ‘national debt’ and is added to the debt each year that a deficit occurs. The effect is cumulative. The total ‘national debt’ is a combination of the debt held by the public or all federal securities held outside the government, and intergovernmental debt or treasury securities held in accounts and administered by the federal government.

One of the troubling aspects of the debt held by the public is that it includes debt owed to foreign countries; roughly 32% of the national debt. In essence, this borrowing from other countries’ governments is borrowing from their citizens to pay for programs for our citizens. The solution to reducing the growing ‘national debt’ is less spending and more revenue…

In the article “Scary Debt Facts for 2012” by Jill Schlesinger writes: As the President unveiled the 2013 fiscal year budget, the nation’s financial situation came back into sharp focus. Experts say partisan gridlock in Washington means the budget will probably go nowhere. Considering this is an election year, however, expect politicians to harp on facts, figures and terms that most Americans weren’t taught in high school.

To help out, it’s time to dredge up lots of scary facts to make you pay attention. Before we get going, a quick primer on the number ‘TRILLION’: $1 trillion = $1,000 billion or $1,000,000,000,000 (that’s 12 zeros). How hard is it to spend a trillion dollars? If you spent one dollar every second, you would have spent a million dollars in 12 days,  it would take 32 years to spend a billion dollars, and more than 31,000 years to spend a trillion dollars. Some facts about the national debt and the deficit:

  • 2012 U.S. deficit = $1.33 trillion
  • 2013 Proposed budget deficit = $901 billion
  • Current national debt = $15.3 trillion (or $49,030 per every man, woman and child in the U.S. or $135,773 per taxpayer).

A few historical facts:

  • When Ronald Reagan took office in 1981, the U.S. national debt was just under $1 trillion. When he left office eight years later, it was $2.6 trillion.
  • Under President Bush: At the end of calendar year 2000, the debt stood at $5.629 trillion. Eight years later, the national debt stood at $9.986 trillion.
  • Under President Obama: The debt started at $9.986 trillion and escalated to $15.3 trillion, a 53% increase over three years.
  • FY 2013 budget projects a deficit of $901 billion in 2013, representing 5.5% of GDP, down from a deficit of $1.33 trillion in FY 2012.
  • The U.S. national debt rises at an average of approximately $3.8 billion per day.
  • The U.S. government now borrows approximately $5 billion every business day.
  • The current debt ceiling is $16.394 trillion effective Jan. 30, 2012.
  • The U.S. government has to borrow 43 cents of every dollar that it currently spends.

In the article The 2013 Budget and Corporate Taxes” by Jonathan Masters writes:  The release of the 2013 White House budget willprovide fresh grist for the fiscal policy debate in Washington as lawmakers look to balance short-term stimulus measures and the economic recovery with long-term deficit reduction and a spiraling national debt. One issue where Republicans and Democrats may be able to find common ground, analysts say, is on corporate tax reform.

Both parties have acknowledged shortcomings in the current corporate tax code and support a reduction in the U.S. statutory rate as a way to increase the global competitiveness of U.S. corporations. Lowering the corporate rate and closing loopholes, or base broadening, may also provide a higher level of federal revenues. But disagreement remains on several issues, including the way U.S. multinationals are taxed on foreign profits.

Corporate taxation is currently the third-largest source of federal income, fluctuating around 10% of all revenues, or 2% of GDP, in recent years. Tax breaks enacted to help drive the recovery have kept corporate income tax receipts at unusually low levels for the past three years, averaging just 1.2% of GDP– although the Congressional Budget Office expects this number to more than double by 2014.

The United States has a comparatively high statutory corporate tax rate–39.2% (including state taxes) versus a OECD weighted average of 25.5%. But the effective corporate tax rate–the ratio that companies actually pay after leveraging a myriad of tax ‘loopholes’ will soon average around 26%, up from a forty-year low of 12.1% in 2011, due to new regulations.

Still, business groups contend they are at a disadvantage in the global marketplace because they often face a higher effective rate than foreign competitors.The U.S. also taxes the foreign income of its firms, unlike most other large economies, encouraging many U.S. companies to keep their profits overseas to avoid the cost of repatriation. A high U.S. rate may incentivize U.S. firms to move operations overseas altogether, taking valuable jobs with them.

The White House supports deficit-neutral policy proposals that reflect cutting the statutory rate while broadening the corporate tax base. President Obama’s 2013 budget specifically calls on Congress to immediately begin work on corporate tax reform that will close loopholes, lower the overall rate, encourage investment here at home, and not add a dime to the deficit.

In his 2012 ‘State of the Union’, the president also proposed that every multinational corporation pay a basic minimum tax that would prevent some companies from avoiding most of their tax burden. Republicans support a cutting and base-broadening strategy, but would also like to move the U.S. to a territorial tax system and exempt U.S. companies from paying taxes on overseas earnings. Critics of this policy contend it would preference foreign over domestic investment and effectively export U.S. jobs overseas.

Any cut to the statutory rate should be tied to inducements for firms to invest rather than simply pocket the profit, writes Bruce Stokes for the National Journal. “Incentivizing companies to invest some of their tax savings into bonds issued by a national infrastructure bank would do so and help rebuild the nation’s eroding roads, rails, and water systems”, Stokes writes.

A policy brief from the ‘Peterson Institute for International Economics’ recommends the implementation of a broad-based consumption tax to replace the high statutory corporate tax rates. Such a tax would be akin to the value-added tax or the goods and services tax used as the primary means of taxing consumption in every OECD country except the U.S. “Lawmakers should exempt U.S. firms from paying taxes on profits repatriated from foreign countries with an effective corporate tax rate of 20% or higher”, writes Harvard’s Robert C. Pozen for Bloomberg.

According to Pozen, such a measure would encourage the payment of reasonable taxes and limit companies’ ability to exploit tax shelter countries like the Cayman Islands. In the New York Times, David Leonhardt says;the U.S. corporate tax code is ‘the worst of all worlds’, with its high rate and numerous loopholes”. He argues the system makes compliance inefficient and expensive, and ultimately slows economic growth.

In the article “Quantifying National Debt- Just the Facts” by James D. Agresti writes: As of August 12, 2010, the official debt of the U. S. was $13.3 trillion ($13,317,048,837,517). As of September 30, 2009 (end of fiscal year) the U.S. had:

  • $6.5 trillion ($6,544,700,000,000) in liabilities such as federal employee retirement and veterans’ benefits.
  • $18.5 trillion ($18,538,000,000,000) in projected shortfalls in the Social Security program.
  • $33.5 trillion ($33,467,000,000,000) in projected shortfalls in the Medicare program.
  • $140 billion ($140,000,000,000) in projected shortfalls in other ‘social insurance’ programs.

These shortfalls are referred to as ‘closed group present values’ and are calculated in a manner that approximates how publicly traded companies are required to calculate their debts and obligations. The figures represent how much money must be immediately placed in interest-bearing investments to cover the shortfalls between projected revenues and expenditures for all current taxpayers and beneficiaries in these programs.

  • Combining the figures above with the national debt and subtracting the value of federal assets, the federal government has $63.6 trillion ($63,604,500,000,000) in debt, liabilities, and unfunded obligations as of September 30, 2009.
  • This shortfall exceeds the combined net worth of all U.S. households ($53.5 trillion), which includes all assets in savings, real estate, corporate stocks, private businesses, nonprofit organizations, and consumer durable goods such as automobiles, televisions, and furniture.

Last year, Standard & Poor’s cut the outlook on the U.S.’s long-term credit rating from stable to negative for the first time since World War II. While the impasse is frustrating, it is important to understand that the real hurdles are more political than philosophical. Raising the federal debt limit without first agreeing to a sweeping plan to reduce the $14.2 trillion national debt is irresponsible.

According to the Congressional Budget Office, in fiscal year 2011, the U.S. budget deficit amounted to $1.3 trillion, with federal receipts amounting to $2.3 trillion and government spending to $3.6 trillion. In short, the U.S. borrowed about 36 cents for every dollar it spent. That is lower than the 40 cents borrowed in 2009, but still very unsustainable if continued.

According to the article; ‘Blueprint for Reducing Debt Lies in Cuts and Revenues’ by Mario Belotti and Chase Thomet write: It is time for the president and Congress to get together and reduce government deficit to a more sustainable level. For example: Bush tax cut should be allowed to expire for all income levels, dividend and capital gains tax rate should be increased to 20%, and most carried interest income should be taxed at the personal income tax rate.

On the spending side; apart from some defense cuts, real cuts in spending must come from greater government efficiency, the elimination and consolidation of government offices, and cuts in entitlement programs. In the long run, Congress should modify the tax and spending laws in line with the proposals of the ‘Simpson-Bowles Commission’. The longer Washington waits, the higher the revenue increases and the deeper the spending cuts that will be required in future years.

According to the ‘Government Accountability Office’, the U.S.’s unrestrained spending ‘will ultimately affect every citizen in the nation’. In his testimony before Congress, Congressional Budget Office Director, Peter Orszag noted; under any plausible scenario, the federal budget is on an unsustainable paththat is, the federal debt will grow much faster than the economy over the long run. Therefore, though the decisions will be difficult, the deficit and the debt cannot continue to grow uninhibited.” From an economic standpoint, time simply is running out, and to continue to borrow at these levels is ‘utterly unsustainable and irresponsible’.

Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources. With government expenditures now running 185% of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap ~Warren Buffet