How the Budget Is Funded: The U.S. Government's total revenue was $2.4 trillion in 2006. 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) admits that even the portion of corporate income taxes and even the Social Security taxes paid by corporations ends up being passed onto workers through higher prices and lower wages to offset the taxes. In reality, everything the government spends comes out of your pocket.
The Budget's Relation to GDP: The CBO keeps the budget at about 20% of GDP each year. This means that the total budget should only grow as fast as the economy does, which has been about 3% per year on averag. The government is reluctant to raise taxes higher than this level, since it could slow economic growth by taking money out of consumers' pockets. Consumer spending 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 will provide an immediate boost. However, 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: For example, President Bush cut taxes in 2001 (JGTRRA) and 2003 (EGTRRA). During the recession of 2000, the percentage of income to GDP went up to 20.9%. 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. During his time, the economy grew, and revenues increased.
Supply-siders, including the President, 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.
