Balance the Budget Now!

The math problem was described a couple years ago by Senator Mark Warner: “Federal spending is at an all-time high of 25 percent of our GDP, and our government revenue is about 15 percent of GDP, a 60-year low.”

If we wanted to end the annual deficit immediately there are three solutions:

  • A) Cut spending to 15% of GDP.
  • B) Compromise: Cut spending to 20% of GDP and Raise taxes to 20% of GDP.
  • C) Raise taxes to 25% of GDP.

It is unlikely that we can roll spending back to where it was 60 years ago. Raising revenues will have to be part of the solution.

There are several different approaches to raising tax revenues. One is a broad tax reform approach, involving many decisions on which credits and deductions to eliminate and which to keep.

But a quick fix, would be a tax rate adjustment. To do the compromise, cutting spending and raising revenues to 20% GDP, involves an across the board 33% increase in tax rates (.20GDP/.15GDP). And if we wanted to do the whole thing with a revenue increase, then going from 15% to 25% GDP is a 67% increase in the rates (.25GDP/.15GDP).

Below is the 2012 Tax Table for Single Individuals.

  • The 15% column has the current rates.
  • The 20% column is the compromise.
  • The 25% column is all revenue.

If we want to begin paying down the $17 trillion national debt, then it may be wise to cut spending to 20% of GDP and raise taxes to 25% until the debt is paid off, then reduce the rates to the 20% level.

2012 Schedule X – Single

  • Percentage of GDP        15%     20%    25%
  • 0              –   8,700           10%     13%    17%
  • 8,700      –  35,350          15%     20%    25%
  • 35,350    –  85,650          25%     33%    42%
  • 85,650    – 178,650         28%     37%    47%
  • 178,650  – 388,350        33%     44%    55%
  • 388,350 – And Up          35%     47%    58%

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