2017 = Rising US deficits and dumping tax hikes onto middle class? Bad idea

It was buried among our whiner-in-Chief’s Twitter tantrums over the weekend, but Friday afternoon we found out about the final budget numbers from Uncle Sam for Federal Fiscal Year 2017.

The federal government finished fiscal 2017 with a budget deficit of $666 billion, an increase of $80 billion over the previous year. It was the biggest shortfall since 2013 and the sixth-highest on record.

The deficit equaled 3.5% of gross domestic product, up slightly from the prior year. Spending rose by 3% for the fiscal year, while receipts climbed by 1%. The government’s fiscal year runs from October through September.

And if you look at the official Treasury Statement, you’ll find that the biggest increase in those receipts came from “Employment and General Retirement”- in other words, Social Security and Medicare payroll taxes – up $49.6 billion from the year before (+4.67%). Interestingly, payments to Social Security and Medicare only went up by $32.4 billion last year (keep in mind when the GOPs try to cut Social Security and Medicare during “tax reform”- and they will try).

By comparison, other federal tax revenues were tepid at best, and corporate tax revenues actually went down.

Change in revenue, FFY 2017 vs FFY 2016
Individual Income Taxes +$40.0 billion (+2.65%)
Corporate Income Taxes -$2.5 billion (-0.84%)
Excise Taxes -$11.2 billion (-11.81%)
Estate/Gift Taxes +$1.4 billion (+6.62%)
Customs Duties $-0.3 billion (-0.75%)
Miscelleaneous/Other Ins./Retirement -$29.9 billion (-14.41%)
TOTAL NON-SS/MEDICARE TAX -$1.5 billion (-0.07%)

Also worth noting, while corporate income taxes went down, overall corporate profits were up 6.3% in Q2 2017 than they were in Q2 2016, and after-tax profits were up 7.8% in Q2 2017 vs a year prior (see Table 11 in this publication). So it’s not like there’s a high tax rate keeping profits from occurring, especially when you realize stock buybacks and dividends remain at or near record highs.

What’s also interesting to note is what has happened to the federal deficit in the 2 years since Republicans took over both the House and Senate after the 2014 elections, meaning that 2015-16 was the first budget passed with them running both houses. The deficit bottomed out at $438 billion in 2015 after 4 straight years of declines, and now has gone back up over $228 billion since then.



But despite the rise in the deficit and the decline in corporate tax collections, the Republicans in Congress and in the White House are still calling for regressive tax cuts that give away even more to the rich, which led to last week’s action where the Senate passed a budget resolution 51-49. Passing the resolution does little when it comes to actual law changes, but as CBS MarketWatch’s Robert Schroeder points out, it does make it easier for final legislation to get through.

The budget [resolution] is key since it allows Republicans to use what’s known as reconciliation, a procedure under which bills can pass the Senate with a simple majority. That’s critical since the GOP holds 52 seats in the Senate, and even a small number of defections dooms legislation. That’s what happened with the latest drive to repeal and replace Obamacare. On the budget bill, only Sen. Rand Paul of Kentucky voted “no.” In a tweet Friday morning, Trump predicted the Kentucky Republican would support tax cuts when a bill comes up for a vote.

Basically, changes to the budget would be “reconciled” in one bill. This was the same procedure that Republicans tried to use to repeal and/or deform Obamacare earlier this year, but failed when they couldn’t get 50 Senators to agree on a final bill.

In other words, the real work on GOP “tax reform” actually begins now. There’s not even a formal bill that has been introduced with the specific changes, just a 9-page framework document from last month that had few details in them. And of course, the details are the real problem here with the GOP bill.

Because the GOP tax framework gives so much away to the rich, there has to be some other kind of revenue to offset at least a portion of those tax cuts to keep the deficit from exploding. And that led to this report which came out over the weekend.

Proposals floating around Washington to cap the amount that Americans can contribute before taxes to 401(k) plans and individual retirement accounts are unsettling professionals in the retirement industry….

Lobbyists and others in the retirement and financial services industries who have spoken to congressional staff and committee members say lawmakers are looking at proposals that would allow 401(k) participants to contribute significantly less than what is currently allowed in a traditional tax-deferred 401(k). An often mentioned amount is $2,400 a year. It isn’t clear whether that would only apply to 401(k)s or IRAs or both.

So after decades of claiming 401-k’s were a great tax-sheltered investment and way to make up for disappearing pensions (a sketchy enough claim by itself), now GOPs are considering limiting how much people can write off to less than $100 every 2 weeks? That’s a sickening double-whammy, especially to workers who are trying to “catch up” on retirement savings, or with younger workers who are just starting to be able to invest that amount of money. Apparently even Donald Trump didn't think limiting 401(k) were a good plan, as the President* formally opposed that idea today.

But the other options to offset revenue aren’t that good, either. The largest common deduction that may go away under tax “reform” would be the deduction for state and local taxes (SALT). Not only would you be likely to pay more taxes if you are a typical middle-class or upper-middle class homeowner in an area that has property taxes, but the Center on Budget and Policy Priorities notes that it would likely lead to further budget cuts at the state and local levels.

Ending the SALT deduction would strain state budgets over time by making it harder for states and localities to raise the revenues needed to invest adequately in their communities.

The SALT deduction is effectively a form of revenue sharing between the federal government and state and local governments. To understand how it works, consider a taxpayer in the 28 percent federal income tax bracket. When a state raises $1 of additional revenue from this taxpayer, his overall taxes rise only by $0.72 because for that additional $1 in state tax payments, he or she can deduct 28 cents. Without that deduction, taxpayers would be less likely to support current state and local tax levels. As a result, states and localities would likely struggle even more than they do now to raise adequate revenue… (as we have already seen in Wisconsin)

This strain on state and local budgets from repealing the federal SALT deduction would likely result in cuts down the road to state and local services. These cuts could well include reductions in support for education — the single largest part of state budgets — as well as cuts to infrastructure spending and other investments that are key to the nation’s long-term economic prospects. Since states and localities provide over 90 percent of K-12 school funding, and pay 75 percent of the cost of maintaining and improving the nation’s non-defense public infrastructure assets, their capacity to make these investments is particularly important to the nation’s future economic strength. Further, many states already have cut funding for these crucial investments, making the prospect of additional cuts particularly disturbing. For example, the average state has cut funding for higher education per student by 16 percent over the last decade, after adjusting for inflation. And more than a quarter of the states have cut general support for K-12 education by 7 percent or more per student over the same period.[6] In addition, state and local government spending on physical infrastructure dropped from its high of 3 percent of the nation’s gross domestic product in the late 1960s to less than 2 percent in 2015.[7]

Of course, if you’re a Koch/Norquist-type wack job in DC Bubble World, you may like the idea of starving governments of revenue leading to breakdowns in services and sell-offs to corporations. But for the vast majority of us, I don’t think that’ll end up being a good trade.

The other shell game that this might encourage is that sales taxes and other fee-based revenues would be more likely to be raised at the state and local levels, since those aren’t written off today in most states (including Wisconsin), so there's no change in tax benefits by changing these levels even if SALT goes away. This would likely make the tax code even more regressive at the state level than it already is, which oligarchs may be cool with, but I bet you won’t be.

My thoughts at this point on “tax deform” is to remain vigilant, since there’s no bill to vote on at this time anyway. But realize that the last thing this top-heavy economy needs is another giveaway to the rich and corporate in a time when the deficit is rising along with inequality, which means that GOP support of this tax bill shows that they don’t really care about what happens to 99% of us. Which means you have to remove any Kochsucker candidate who supports shoveling even more money to their donors at our expense.