How the Budget Is Funded:
The U.S. Government's total revenue is estimated at $2.38 trillion in for FY2010. The individual taxpayer -- you -- provides most of the income for the Federal Government’s budget.
- Income taxes contribute 43%.
- Social security taxes are 37%.
- Corporate taxes are only 13%.
- Excise taxes and other make up the remaining 7%.
The Congressional Budget Office (CBO) points out that, in effect, the entire U.S. tax burden really falls on individuals. That's because corporations pass on their tax burden to consumers in the form of higher prices or lower wages. Corporations must maintain their profit margin to satisfy stockholders, so any additional corporate taxation will be passed on to consumers or workers. In reality, everything the government spends comes out of your pocket.
The Budget's Relation to GDP:
The Office of Management and Budget (OMB) estimates revenues at about 16.2% of GDP for 2010. Thanks to the recession, this is less than the normal 19% target. The government has provided tax rebates to spur consumer spending. This is the primary driver of the economy, since over 70% of what the U.S. produces is for personal consumption.
Do Tax Cuts Increase GDP?:
Supply-side economics is the theory that states that tax cuts will increase GDP. A study by the Treasury Department showed that, in the short-term and in an economy that is already weak, tax cuts provide an immediate boost. The cuts must ultimately be balanced with a reduction in spending to avoid increasing the Federal Debt. Left unchecked, the Federal Debt will slow the economy.(Source: U.S. Treasury Department, A Dynamic Analysis of Permanent Extension of President's Tax Relief, July 25, 2006)
An Example With Recent Tax Cuts:
During the recession of 2001, the percentage of income to GDP went up to 20.9%. The government cut taxes in 2001 (JGTRRA) and 2003 (EGTRRA). After the tax cuts of 2001, the percentage fell to 18% of GDP, and the tax cuts of 2003 reduced the percentage even further to 16% of GDP in 2004. However, the cuts spurred economic growth. Even though the percent decreased, total revenues increased.
Supply-siders said that was because of the tax cuts. Other economists point to lower interest rates as the real stimulator of the economy. The FOMC lowered the Fed Funds rate from 6% in the beginning of 2001 to a low of 1% by June 2003. (Source: New York Federal Reserve, Historical Fed Funds Rate)
The Tax Increase Prevention and Reconciliation Act of 2005 extended lower tax rates for long-term capital gains and dividends through 2010. This did not significantly impact government income, and the percentage to GDP returned to 18% by 2006.
Can Tax Cuts Increase Revenue?:
A study by the National Bureau of Economic Research found specific figures on how much revenue will be recouped by tax cuts:
- 17% of income tax cuts,
- 50% of corporate tax cuts.
