Federal Budget Surplus or Deficit; Total Public Debt Annual amount of Federal Budget Surplus or Deficit in Millions of Dollars (1980-2022) (Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget and Treasury)
Generally, an expanding economy leads to a decrease in the U.S. federal government budget deficit as tax revenues increase. The economic expansion in the 1980s led to the deficit declining slightly in the late 1980s, and the strong economic expansion in the 1990s led to budget surpluses. Following the recession of the early 2000s and the financial and economic crisis of the late 2000s, the deficit once again was reduced when economic growth rebounded. However, the tax cuts of 2018 contributed to a growing budget deficit, and combined with the 2020 stimulus to bring the deficit to record levels which in turn pushed total debt to record levels. How to reduce a budget deficit? The equation is pretty simple – either increase tax revenues or reduce government spending. Although the equation is simple, in this era of political harmony (just kidding) exactly what to change to reduce the budget deficit and debt is the hard part. On the tax revenue side of the budget equation, an upcoming event is the expiration of the 2018 individual tax cuts. The U.S. theoretically has a progressive tax structure, with higher tax rates applying to income in higher tax brackets. As your income rises and reaches a higher tax bracket, only that portion of your income in the higher tax bracket is subject to a higher tax rate. There were seven tax brackets in 2017, with tax rates ranging from 10% for the lowest bracket to 39.6% for the highest bracket. In 2018 the tax brackets generally remained the same (adjusted for inflation), but tax rates were generally cut by 2-3% across almost all income brackets (the tax rate in the lowest income bracket remained the same). Tax rates currently range between 10% for the lowest bracket and 37.6% for the highest bracket. Because tax rates were cut for almost all income brackets, generally the greater your taxable income the greater the tax benefit received. The individual tax cuts passed in 2018 were temporary; they expire after 2025 unless extended or changed by law. No doubt a subject of future political discussion, the tax cuts could be kept for all tax brackets, selected tax brackets, or no tax brackets. On the spending side, Social Security is the largest government expenditure and expected to grow in the future due to the aging of the American population. Social Security programs are funded through payroll taxes. Employees and their employers each pay 6.2% of earnings for Social Security taxes; an additional 1.45% of earnings are paid for Medicare taxes. In sum, a total of 15.30% of an employee’s earnings are subject to Social Security and Medicare taxes, with employee and employer each paying 7.65% of an employee’s earnings. There is a salary limit for Social Security taxes. The salary limit is $160,200 in 2023, with the salary limit typically adjusted each year by the approximate level of inflation. (There is no salary limit for Medicare taxes.) If you are thinking that the money you paid into Social Security by you and your employer will be there for you when you retire, alas, it’s not. Current payments into Social Security are being dispersed to those receiving benefits now – any excess payments remain in Social Security trust funds.
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Center for Business and Economic Insight
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