Much of the focus on reducing Government spending is directed at two entitlement categories – Social Security and Medicare. Virtually absent from this discussing is the revenue generated from payroll taxes that supports these entitlements. And, far too little attention is focused on Tax expenditures, which, in the aggregate amount to $1 trillion and have no tax designated to support them.
Social Security in 2011 cost $736 billion. Income was $805 billion, including $691 billion from payroll taxes and $114 billion in interest earnings, as reported by the 2012 Annual Report of the Board of Trustees. Hence, for the year, Social Security had a positive cash flow of $69 billion.
Medicare total expenditures were $549 billion in 2011. Income totaled $530 billion, including $515 from payroll taxes and $15 from interest earnings, according to the 2012 Annual Report of the Boards of Trustees. Hence, Medicare had a negative cash flow of $19 billion.
The two combined had a positive cash flow of $50 billion. A positive cash flow of $50 billion is not a crisis. The problem with Social Security and Medicare is in the future; it is not today. One solution is to raise the payroll taxes that support Social Security and Medicare. This solution allows citizens to pay for the programs they like, but discussions of the problem have focused mostly on cutting these entitlements. (The age for starting Social Security needs to be increased, but that is another subject.)
Tax expenditures include a thousand or so tax deductions, credits and subsidies that in the aggregate amount to $1 trillion. If they were all eliminated, they would nearly eliminate the annual deficit, which is about $1.2 trillion.
Perhaps the most egregious of these tax expenditures is the earmark that entitles hedge-fund managers to pay a maximum tax rate of 15% on their income. Last year, the 25 highest paid hedge-fund managers earned, in the aggregate, more than the aggregate of the 500 CEOs of the Fortune 500 companies. Nobody would argue that these hedge-fund managers contributed more to America that the CEOs of the Fortune 500. Nevertheless, they are entitled to tax breaks not available to other Americans. Hedge-fund managers make significant contributions to the campaigns of members of Congress who are involved in taxation.
The list of tax expenditure entitlements very long and very poorly publicized. For example, the list includes entitlements for Nascar, the tackle-box industry and Eskimo whaling captains.
In an article on tax policy and tax expenditures, The Economist magazine (Jan. 21-17, 2012, page 14) argued: “It would be far better to close or limit loopholes and deductions, currently worth 7% of GDP, which distort behavior (by, for example, encouraging people to take out big mortgages) and mostly benefit the affluent.”
The American public, in general, does not understand the significance of tax expenditures and the television media has done little to enlighten anybody.
