The number 16—with 11 zeros behind it
The Congressional Budget Office recently projected the federal budget deficit for fiscal year 2010 to be $1.6 trillion. Many economists and financial experts in our federal government have told us that a $1.6 trillion deficit is required to re-stimulate our economy. They claim that this deficit is not a problem that should concern us.
I cannot fathom the number 16 with eleven zeros behind it. To put the deficit into a more understandable perspective, let’s determine the “average” US tax payer’s portion of a $1.6 trillion yearly deficit.
According the Bureau of Labor Statistics, in March 2010 there were 138 million workers in the US labor force,. The average weekly salary for these 138 million US employees was $764.00 per week or $39,728 per year.
At the IRS website, you can discover that the total amount of personal federal income taxes, projected to be paid in 2010, is $1.05 trillion. By dividing $1.05 trillion by 138 million, we determine that the “average” income tax paid per worker is $7,619,. Since the “average” pay is $39,728, federal income taxes of $7,619 represent 19 percent of average income.
Most workers pay at least half of their Social Security and Medicare (FICA) taxes, which, at a rate of 7.65 percent of income, is $3,039 of total average income. If we assume that the average state tax is approximately 5 percent, an additional $1,986 of the average income is paid in state taxes.
Thus, the current tax burden for the “average” person earning $39,728 is $12,644 or approximately 32 percent of their income.
If our worker is one of the 20 percent of US workers who are self employed, the FICA taxes are increased to 15.3 percent, for a total tax burden of $15,683 or 39.5 percent of income.
Now that we have determined the “average” tax burden in 2010, let’s calculate the average US workers share of the 2010 $1.6 trillion budget deficit. When we divide $1.6 trillion by 138 million US workers, we find that the “average” portion of the 2010 deficit is $11,594 per US worker. This number represents 29 percent of the income for all US workers.
Combining the $1.6 trillion deficit burden with the 2010 tax burden, the total burden of US taxes and the 2010 budget deficit is equal to 61 percent of the total income from all 138 million workers. Of course, we will not pay the $1.6 trillion deficit out of current income. However, this debt is added to our current US debt and must eventually be paid by us or our children.
Another way to look at the $1.6 trillion dollar budget deficit is that you are making “unfunded” federal government purchases, equal to 29 percent of your before tax income, and putting these purchases onto our nation’s credit card. As with a real credit card, these “purchases” must someday be paid by you, your children or your grand-children.
A politically popular approach to reducing the deficit is to raise taxes on “the rich,” commonly defined as individuals earning over $200K annually. Under our current tax code, the top 5 percent of US wage earners (which starts at annual income levels of approximately $170K) will pay 60 percent of all personal income taxes.
If tax rates increased by 50 percent on the top 5 percent, the maximum amount of additional taxes collected would be approximately $300 billion, reducing the deficit to $1.3 trillion from $1.6 trillion. Obviously, this approach alone will not solve the budget deficit problems.
There are two simple facts about government spending. The first is that 100 percent of the money that our government spends comes from taxes and revenues collected plus borrowed money. The second fact is that there are only three ways to reduce our federal deficits 1) reduce federal government spending 2) increase taxes 3) implement a combination of reduced spending and increased taxes.
As the numbers demonstrate, a deficit exceeding $1 trillion annually is not sustainable. We must decide whether our politicians should increase taxes, decrease spending or do both. The one thing that is clear is that budget deficit must be dramatically and quickly reduced before our total national debt becomes unsustainable for us and our children.