Shrinking the deficit - Four options

Shrinking the deficit - Four options

Here are four options for reducing the deficit. Which ones should Congress choose? Which do you prefer?

Raise taxes on wealthy households and corporations

Currently, federal revenues as a share of the national economy are lower than at any time since 1950. To get the deficit under control, the federal government needs more money. Wealthy households and corporations could be asked to pay more in taxes.

Wealthy households have done extremely well over the last 40 years. As the economy has grown and national income has risen, average income among the bottom 90% of households has fallen slightly. But among the top 1%, incomes grew three-fold after adjusting for inflation: from $379,021 in 1970 to $1,137,684 in 2008.[i] If the national income growth had been shared, every household in the bottom 90% could be receiving nearly 30% more income. Instead, the rich have gotten richer, the poor have gotten poorer, and everyone else has received crumbs. Moreover, even as wealthy households saw their incomes skyrocket, their taxes were cut, especially in the tax cuts of 2001 and 2003.  Is it time to raise their taxes?

  • Limiting the value of tax deductions for the top 2.3% of tax payers could raise $400 billion over 10 years.[ii]
  • Raising the tax rate by one percentage point for those with incomes over $379,000 would raise $84 billion over 10 years. Raising it by two percentage points would bring in $165 billion.[iii]
  • Taxing the income of very wealthy hedge fund managers and venture capitalists at the same rate as everyone else would bring in $21 billion over 10 years.[iv]

Corporate taxes could also be increased. Over the decade of the 1950s, taxes paid by all corporations combined averaged 4.8% of gross domestic product. In the 1960s, the share declined to 3.8%. In the 1970s it fell farther to 2.7% and over the 1980s it went down to 1.7% where it has remained ever since.[v]  Is it time to raise taxes on corporations, close loopholes, and go after tax avoiders?

  • Repealing the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits would bring in nearly $600 billion over 10 years.[vi]
  • Raise corporate income tax rates. Each one percentage point increase in corporate income tax rates would raise $101 billion over 10 years. [vii]

Cut military spending

Since 2001, spending on the military and homeland security including  the Department of Defense, Department of Homeland Security, nuclear weapons, and the Iraq and Afghanistan wars has risen by more than 50%.[viii] Over the decade, we have spent some $7.8 trillion.[ix] Can we find something to cut?

At the same time that military spending has risen dramatically, spending on the safety net and core government functions – like environmental protections, education, the federal courts, energy programs, and public health – has either risen more slowly or been cut. Congress must not cut these further. The much-discussed, across-the-board cuts to military spending (the “sequester”) that were being considered would just reduce spending to its 2007 level, a time when the U.S. was actively fighting two wars which are now ending, and an amount 40% higher than on 9/11. Experts say the Pentagon can absorb these cuts without negatively impacting national security. Should they go forward? More, more, and more.

Make further cuts in non-military discretionary spending

In the federal budget, the category of non-military discretionary spending includes most of the non-military-related functions of government. But it receives just 19% of total federal spending and when spending is reduced, these programs are typically among the first to be cut, as described just above. The 2012 agreement to avoid the fiscal cliff put off serious spending decisions. Given the cuts already imposed on these programs, should they face further cuts?

Cut direct spending for the major entitlement programs: Social Security, Medicare, and Medicaid

The major entitlement programs are 55% of the federal budget. Their large size makes them tempting targets for cutting. But any changes in these programs must be done with extreme care because millions of people rely on them for income, health care, and other necessities.

Social Security’s funding shortfalls can be addressed fairly easily, at another time. But health care in the United States is extremely expensive and needs to be restructured. The problem is not just the public insurance programs like Medicare but also private health insurance. The job of restructuring the health care system is too complicated to be handled as part of a budget deal. However, even without a thorough restructuring, there is one glaring, wasteful excess the budget cutters could address.

When the Medicare prescription drug program was established in 2003, Congress barred Medicare from negotiating with pharmaceutical companies over drug prices as other insurance plans do. This means that drug companies make larger profits and Medicare’s costs are higher than they need to be. Allowing Medicare to negotiate with drug companies over the price of the medicines it buys for Medicare beneficiaries, as other insurers do, would save over $100 billion in the next ten years.[xiv] Should Congress fix this defect in the Medicare prescription drug plan?

Use these Discussion Questions and host a forum where members of your congregation can learn about and discuss these issues.

 [i] Piketty, Thomas and Emmanuel Saez, data for 1970 and 2008, adjusted gross income for tax paying units, includes capital gains, Table A4. Accessed May 15, 2011   

 [ii] Citizens for Tax Justice, “Revenue Provisions in President’s Jobs Bill,” September 19, 2011. Accessed September 21, 2011.

 [iii] Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 2011, pp. 139-140. Accessed Sept. 21, 2011.

 [iv] Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 2011,  pp. 157. Accessed Sept. 21, 2011.

 [v] Tax Policy Center, “Corporate Income Tax as a Share of GDP, 1946-2009.” Accessed  May  4, 2011   

 [vi] Citizens for Tax Justice, “Policy Options to Raise Revenue by Eliminating or Reducing Tax Subsidies for Wealthy Individuals and Profitable Businesses,” September 19, 2011,  Accessed Sept 21, 2011.

 [vii] Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 2011, p. 173.  Accessed Sept. 21, 2011.

 [viii] National Priorities Project, “U.S. Security Spending Since 9/11” Accessed Sept 20, 2011

 [ix] In 2012 dollars.

 [x] The $1.3 trillion in military cuts also were in the budgets proposed by President Obama and others. While the budget was approved by the House of Representatives, it was not passed by the Senate.

 [xi] Assuming the cuts in discretionary spending are proportionally applied to military and non-military discretionary expenditures.

 [xii] CBO baseline assumes military funding for years after 2011 is equal to the 2011 level, adjusted for inflation. CBO, Budget and Economic Outlook: An Update, August 2011, Table 1-5, page 20. Accessed September 20, 2011. Accessed Sept 20, 1011.  According to Chris Hellman, National Priorities Project, Congress provided a small increase in spending for 2011 over 2010. The CBO assumes supplemental military funding continues at $159 b/year, adjusted for inflation. See Current Budget Projections: Selected Tables, and Table 1-5, p7.

 [xiii] This assumes the cuts are spread proportionally over both military and nonmilitary spending. Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2011, Tables 1-5 and 1-6.

 [xiv] Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, March 2011, p. 54.  Accessed Sept. 20, 2011.


Contact Info

Edith Rasell, Ph.D.
Minister for Economic Justice
700 Prospect Ave.
Cleveland, OH 44115