Over the years, we have looked at the effects of a family’s budget on their financial well being, but we haven’t focused on the effects that governmental budgets have on us. With the presentation of President Barak Obama’s first budget for Fiscal 2009-2010 (the “Budget”), we now have an idea of where he might want to lead the nation in terms of spending and taxation, both of which will have significant effects on all aspects of our business and personal lives. As we move into a new period of governance, this seems an opportune time to introduce you to the United States’ budget and how it will affect your life.
First, to clarify: this is not a commentary on the Budget as presented by the President. There will be no political or ideological commentaries here, so if you are looking for opinion, look elsewhere. Second, the Budget as sent to the Congress is not final law; the President acknowledges there will be many battles over the budget with lawmakers from both sides of the aisle. It does, however, give us some information so we can begin to formulate plans for our own future. Third, as with all governmental documents, it is fascinating to look at the numbers and learn where our government actually gets its operating funds.
Have you ever wondered where our government gets its money? Sure, it gets revenue from taxes and fees, but what is the source of that revenue? Page 119 of the Budget gives us a breakdown of the government’s expected revenue.
The single biggest source of revenue for the Federal government is the United States citizenry. Of the $2.4 trillion in expected revenue for Fiscal 2010, $1.9 trillion comes from income and payroll taxes. Of that amount, $439 billion is withheld from employees for their share of payroll taxes and $1.061 trillion is paid in the form of income taxes.
Corporate tax receipts pale in comparison to the government’s main source of revenue, coming in at $222 billion. This is not an anomaly due to current economic conditions, but rather remains fairly consistent throughout the ten year period projected by the Budget. In fact, corporate income tax receipts in 2008 were 26.5% of individual income tax and will be in that range after 2011. Projected receipts are down somewhat in 2009-2011 as the country is in a recovery phase.
Other sources of governmental revenue are excise taxes (gasoline and similar taxes), estate taxes and numerous other fees. A new source of revenue for Fiscal 2012 and thereafter is entitled “climate revenues”, primarily from the sale of emissions permits, and are projected to be approximately $80 billion per year.
With all the money coming in, one might expect the government to be in good fiscal shape, but appearances are deceiving. It takes a lot of money to run our government and costs won’t decrease in the future, although spending priorities may change somewhat.
Though not the largest budget item, one of the major costs is the net interest expense of the government. Though some Americans are not happy with the low interest rates, they have reduced the government’s interest expense over fiscal 2008. With lower spending and lower debt in Fiscal 2008, the U.S. government spent $253 billion on interest compared to projected interest of $139 billion in 2009 and $164 billion in 2010.
The single largest discretionary cost is defense spending, expected to be $666 billion in 2009 and $673 billion in 2010. Defense spending accounts for 20% of total Federal expenditures, excluding financial stabilization expenses. As the costs of operations in Iraq and Afghanistan are reduced over the next few years, so too will the spending at the Dept. of Defense. All other departments are expected to cost $695 billion in 2010.
It should come as no surprise that the next largest expenditure by the Federal government is for entitlement programs. Social Security is expected to cost $695 billion in 2010 and Medicare will cost $453 billion. Medicaid is expected to cost $290 billion. Total “mandatory” or entitlement programs will be approximately $2 trillion in 2010.
A Few Thoughts
Even a cursory review of the budget numbers gives pause for concern. Just as with household budgets, the Federal government can continue to spend money it doesn’t have, but, at some point, it too will reach borrowing capacity. That means there will come a time when revenue must exceed expenditures and the government must reduce debt. In a free market economy, that revenue will have to come from individuals and businesses in the form of taxes. Just how those taxes will be levied is a subject of much concern.
The Budget envisions an increase in taxes through a combination of economic growth and increased taxes on certain income groups. Most notably, estate taxes and taxes on higher income earners are expected to increase.
The greatest increase in income taxes will be from higher income earners (married individuals filing joint with income over $250,000 and singles with income over $200,000). The budget envisions the reinstatement of a 36% tax bracket and a 39.6% bracket. This will raise an additional $15.8 billion in fiscal 2011, eventually increasing to $51.7 billion in 2019. Reinstating the phase-out of the personal exemption and limitations on itemized deductions will add $7.2 billion in taxes in 2011, ultimately rising to $27 billion in 2019. Finally, imposing a tax rate of 20% instead of 15% on capital gains and dividends will increase taxes by $1.1 billion in 2010, $5.4 billion in 2011 and eventually rising to $19.9 billion in 2019.
Estate taxes are projected to remain at the 2009 levels.
Through a combination of additional taxes and repeal of other provisions, chiefly ones affecting international taxation, business taxes will increase by $1 billion in 2010 to $48 billion in 2019.
The Budget does take into account making certain credits just recently enacted into law permanent, a portion of which will be paid for with climate taxes. For example, the Making Work Pay Tax Credit is expected to cost $63.7 billion in 2012. Of the $78.7 billion to come from climate taxes, $63.7 billion will be used to pay for the credit.
So what does this all mean to the average taxpayer? Obviously, it means that many of us will continue to require careful tax planning to minimize ordinary income and maximize capital gains, dividends and the like. Even with an increase in the rates, ordinary income will still cost nearly double the tax that dividends and capital gains produce. Estate planning will also continue to be necessary. While the current level of the estate tax exemption keeps many from being taxed, others will continue to require some planning to minimize taxes.
Most importantly, what the Budget tells us is that there is a new playing field with respect to spending and taxation in the United States. How that will ultimately play out is anyone’s guess, but higher income earners need to be cognizant of the potential for increased tax rates and to plan for changing tax laws. This firm will keep track of developments for you. Just give us a call and let’s see how we can help you keep your tax burden to a minimum.