2010 U.S. Federal Budget - by category of spending

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The Budget of the United States Government provides a breakdown of federal government spending by category.

The President's budget for 2010 totals $3.55 trillion. Percentages in parentheses indicate percentage change compared to 2009. This budget request is broken down by the following expenditures:

Mandatory spending: $2.184 trillion (+15.6%)
$695 billion (+4.9%) - Social Security
$453 billion (+6.6%) - Medicare
$290 billion (+12.0%) - Medicaid
$0 billion (-100%) - Troubled Asset Relief Program (TARP)
$0 billion (-100%) - Financial stabilization efforts
$11 billion (+275%) - Potential disaster costs
$571 billion (-15.2%) - Other mandatory programs
$164 billion (+18.0%) - Interest on National Debt

Discretionary spending: $1.368 trillion (+13.1%)
$663.7 billion (+12.7%) - Department of Defense (including Overseas Contingency Operations)
$78.7 billion (-1.7%) - Department of Health and Human Services
$72.5 billion (+2.8%) - Department of Transportation
$52.5 billion (+10.3%) - Department of Veterans Affairs
$51.7 billion (+40.9%) - Department of State and Other International Programs
$47.5 billion (+18.5%) - Department of Housing and Urban Development
$46.7 billion (+12.8%) - Department of Education
$42.7 billion (+1.2%) - Department of Homeland Security
$26.3 billion (-0.4%) - Department of Energy
$26.0 billion (+8.8%) - Department of Agriculture
$23.9 billion (-6.3%) - Department of Justice
$18.7 billion (+5.1%) - National Aeronautics and Space Administration
$13.8 billion (+48.4%) - Department of Commerce
$13.3 billion (+4.7%) - Department of Labor
$13.3 billion (+4.7%) - Department of the Treasury
$12.0 billion (+6.2%) - Department of the Interior
$10.5 billion (+34.6%) - Environmental Protection Agency
$9.7 billion (+10.2%) - Social Security Administration
$7.0 billion (+1.4%) - National Science Foundation
$5.1 billion (-3.8%) - Corps of Engineers
$5.0 billion (+100%) - National Infrastructure Bank
$1.1 billion (+22.2%) - Corporation for National and Community Service
$0.7 billion (0.0%) - Small Business Administration
$0.6 billion (-14.3%) - General Services Administration
$19.8 billion (+3.7%) - Other Agencies
$105 billion - Other

SIX CATEGORIES OF SPENDING COMPRISE MORE THAN 75% OF THE U.S. FEDERAL BUDGET:

Social Security
Medicare
Medicaid and the State Children's Health Insurance Program (SCHIP)
Unemployment/Welfare/Other mandatory spending
Interest on National Debt
Department of Defense

SERIOUS DISCUSSIONS ABOUT REDUCING THE SIZE AND SCOPE OF FEDERAL GOVERNMENT SPENDING MUST ADDRESS THESE CATEGORIES.

25 People to Blame for the Financial Crisis

The February 12, 2009 TIME magazine article "25 People to Blame for the Financial Crisis" reports on "the good intentions, bad managers and greed behind the meltdown."

Could You Live On A Food Stamp Budget?

In the February 9, 2009 Slashfood article "Could You Live On A Food Stamp Budget?," Emily Matchar reports on the challenges of a limited income:

We talked earlier this month about whether we could live on a $15 a week grocery budget. Many of us thought we could, though it would be hard, time-consuming and rather boring. Now, CNN reporter Sean Callebs is attempting to see what it's like to eat for $176 a month, the most a single food stamp recipient can get in a month. The economic stimulus bill is calling for raising food stamp payments by 13 percent, a sign that the current payments are not enough, Callebs says.

So far he seems to be doing OK, eating basic but healthful meals like chicken stir fry and grilled cheese sandwiches with salads. He's also eating a lot of peanut butter sandwiches and a lot of pasta with tomato sauce. But, Callebs points out, he has time to cook and is well-educated on which cheap foodstuffs are also healthy. He also has energy to run three or four miles a day, making his carb-heavy diet less of a weight gain risk. The average food stamp recipient may be working two jobs, with little time to spend in the kitchen chopping and stir-frying lean cuts of chicken.

Callebs is also getting a lot of interesting comments, ranging from budget and shopping tips to admonishments to "stop whining" to thank-yous for raising awareness about consumer food spending.

The Big Mac index

The Economist magazine uses the Big Mac Index to measure the relative purchasing power of various currencies. (Click the image below to enlarge it.)According to Economist.com:

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

U.S. Retail Gasoline Prices

U.S. Retail Gasoline Prices ...

How the Government Dealt with Past Recessions

An interactive graph "How the Government Dealt With Past Recessions" appeared in the January 26, 2009 edition of The New York Times.

How the Government Dealt With Past Recessions

The January 26, 2009 New York Times article How the Government Dealt With Past Recessions provides an interactive graph to illustrate the U.S. economic recessions that began in 1960, 1969, 1973, 1980, 1981, 1990, and 2001:

Since the Great Depression, presidents have frequently experimented with Keynesian economics to combat recessions. Three economists chronicle the history of government policy during past recessions and explain what worked and what didn’t.

The National Retail Sales Tax: What Would the Rate Have To Be?

In "The National Retail Sales Tax: What Would the Rate Have To Be?", William G. Gale argues the tax rate would need to be 44%:

This report addresses a technical issue regarding the national retail sales tax: What would the required tax rate have to be? According to the report, the four principal results are:

First, as long as real federal revenues and real federal spending are maintained during the transition to a sales tax, the required sales tax rate would not depend on whether federal purchases are subject to tax or whether consumer prices rise after the sales tax is imposed.

Second, H.R. 25, a recent legislative proposal, would replace the existing income, corporate, payroll, and estate and gift taxes with a 23 percent tax-inclusive (30 percent tax-exclusive) sales tax on almost all private consumption, a significant portion 23 percent (tax-inclusive), the revenue loss would exceed $7 trillion over the next decade relative to current law.

Third, with plausible allowances for avoidance, evasion, and tax exemptions for some private consumption and some state and local purchases, both the required tax rates and the revenue loss from imposing a sales tax at a 23 percent tax-inclusive rate climb significantly higher.

Fourth, the commonly cited 23 percent tax-inclusive rate in H.R. 25 was derived using a set of assumptions about changes in the price level that are not consistent with each other and that lead to an estimated tax rate that is systematically and substantially too low.

The Fair Tax Act of 2007

The Fair Tax Act of 2007 - a plain English summary, provided by its proponents at FairTax.org, fails to specify who will pay more in taxes under this proposal and who will pay less.

A 2007 analysis by FactCheck.org provides the answer:

The Fair Tax “will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.”

Book Reviews: 'The Fairtax Book' and 'Flat Tax Revolution'

The New York Times review of 'The Fairtax Book' and 'Flat Tax Revolution' says:

November 13, 2005
'The Fairtax Book' and 'Flat Tax Revolution': 1040EZ — Really, Really EZ

By Joel Slemrod
Almost everyone agrees that our tax system could be a lot better - simpler, fairer and less of a drag on the economy. However, opinions about how to fix it vary widely. Earlier this month, a bipartisan reform panel created by President Bush presented two reform options that straddle the standard liberal and conservative positions. While the headlines focused on the reduction or elimination of popular breaks like the mortgage interest deduction, the report also suggested fundamental changes in how business and capital income are to be taxed.

These two new books, both coming from the right, suggest that merely reforming the current system is too timid. The correct policy medicine, the authors say, is to junk the income tax entirely and replace it with a consumption tax with a single tax rate for all Americans.

In "The FairTax Book," the syndicated radio host Neal Boortz and Representative John Linder, Republican of Georgia, claim that replacing all federal taxes - income, payroll and estate taxes - with a national sales tax would increase the average household's purchasing power by about 20 percent, end the need for the I.R.S. and turn April 15 into just another spring day. "Once the FairTax takes effect," they declare, "you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes or Medicare taxes - and you'll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax."

For a book that claims in its introduction to be "about honesty," this statement falls far short. No reputable economist of any political stripe would support it. The honest truth is that replacing the current tax system with any system that raises the same amount of revenue (as Boortz and Linder claim their plan does) may make us better off, but only by redirecting our resources away from dealing with complex filing requirements and improving our incentives to work, save and innovate - not by creating the kind of free-lunch miracle suggested here.

As for "saying goodbye" to the I.R.S., the authors' plan does so only by passing the responsibility for tax collection to the states. And what a responsibility it would be. In order to fully replace all federal taxes, the sales tax would probably have to be at least 40 percent - possibly even more than twice the 23 percent rate the authors claim, and certainly far higher than anything ever levied by any country. The enforcement problems would be different than those the I.R.S. now faces, but they would not necessarily be smaller. Even at an average rate of around 5 percent, state sales taxes are difficult to administer. Apparently the authors have not talked much to administrators who have to deal with, among other things, ineligible people declaring themselves to be businesses to qualify for the business exemption.

Oh, yes, Boortz and Linder's claim that their plan would make April 15 another ordinary day is true, because no individuals - just retail businesses - would have to file tax returns. Instead, every day is tax day as people pay their taxes on every trip to the grocery store, the car dealer or even the doctor, since the FairTax base extends to services that nearly all states exempt.

There's one more problem. Moving to a national sales tax would drastically shift the tax burden away from high-income families and toward low-income families. To remedy this, under the FairTax plan the government would send each taxpayer a monthly "prebate" based on family size, which would amount to $492 per month for a married couple with two children. But Boortz and Linder offer few details about the costs and complications of this vast system of transfers.

Steve Forbes is also pushing a tax plan, one he claims would "free America" from "the tyranny of the federal tax code." At first glance, his "flat tax" - which he has been pushing at least since his unsuccessful 1996 presidential campaign - looks like the current income tax, in that both businesses and individuals would file an annual return. But there are some big differences. Under the flat tax, there would be no deduction for mortgage interest, state and local taxes or charitable contributions. A 17 percent rate would apply to all taxable income, whether the taxpayer is Bill Gates, Steve Forbes or the mechanic who fixes their cars. Investment income would not be taxed at all under the individual tax, which by itself benefits predominantly higher-income taxpayers. The flat tax would indeed represent a significant simplification over the current system. (On the book's cover, Forbes is shown brandishing a postcard printed with "The Steve Forbes Flat Tax Form" - though, to be fair, the current 1040EZ would fit on the same card.) And cleaning up the tax base would, on balance, allow the economy to operate more efficiently and reduce the extent to which one's tax burden depended on arguably irrelevant factors such as whether one rented or owned a home. These benefits, however, have nothing to do with having a single tax rate. In fact, one of the architects of the flat tax, Robert E. Hall of Stanford University, now favors a plan, known as the X-Tax, that would apply a graduated rate structure to this simplified tax base.

Aspects of the flat tax deserve serious consideration. Unfortunately, Forbes's book does not provide it. Instead, like "The FairTax Book," it promises a free lunch. "Everyone" gets a tax cut under his plan. To guarantee that sound-bite feature, he would give people the choice of computing taxes under the flat tax or staying with the old tax system. That stunning concession guarantees that the nine million words of the current tax code and regulations would not go away after all but would be expanded by hundreds of thousands of new words laying out the flat tax rules and, inevitably, the new rules governing the consequences of going back and forth between the two systems. And then there's the hundreds of billions of dollars that Forbes's plan would add to the deficit. Forbes says that his plan will stimulate the economy so much that the apparent revenue shortfall doesn't materialize. If only this were true. Serious analyses suggest that a flat tax would be good for the economy, but would not produce the economic nirvana needed to close the huge revenue gap.

Tax reform deserves objective analysis of the sort these books do not provide. Fortunately, the president's tax reform panel has done a much better job. They considered the retail sales tax, but dismissed it. Both the proposals they outline simplify the tax base, though they retain a reduced mortgage interest break (in the form of a flat credit rather than an itemized deduction, which reduces the tilting of the benefits toward wealthier taxpayers). Both retain a graduated personal rate structure and try to maintain the current distribution of the tax burden. As the criticism following the panel report reminds us, truly revenue-neutral tax reform creates winners and losers, and the losers cry louder than the winners sing. To be sure, the Bush administration's tax cuts have in no way prepared Americans for fiscal sacrifice.

Contemplation of radical tax alternatives is exhilarating, and could help to avoid the kind of loophole-to-loophole combat that tax war veterans recall from 1986, the last time we made wholesale changes in the system. But much progress toward these goals - including eliminating the need for most Americans to file tax returns - can be made within the basic framework of the current system.

These books, to use the language on the jacket of "Flat Tax Revolution," are calls to join a crusade. We'd be better off just starting a conversation.

Joel Slemrod is a professor of economics at the Stephen M. Ross School of Business at the University of Michigan and the author, with Jon Bakija, of "Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes."

Proposals for Tax Reform - Value-added Tax and National Sales Tax (Fair Tax)

President's Advisory Panel on Federal Tax Reform. Final Report. Washington: GPO, 2005.

Options for Tax Reform - A Proposal fro the Cato Institute

"Options for Tax Reform" by Chris Edwards, the director of tax policy studies at the Cato Institute, claims:

President Bush has established an advisory panel to study federal tax reform options. The panel is headed by former senators Connie Mack of Florida and John Breaux of Louisiana. Congressional leaders, including House Speaker Dennis Hastert and Majority Leader Tom Delay, have also pledged their support for reform.

Enacting a major tax reform bill will be a challenge, but the president has been remarkably successful with his tax agenda so far. Income tax rates have been reduced, dividend and capital gains taxes have been cut, and the tax rules on retirement savings vehicles have been liberalized.

However, the tax system remains terribly complex and inefficient. The number of pages of federal tax rules has increased 48 percent in the past decade. The complex alternative minimum tax will hit about 35 million households by the end of the decade if not repealed. The high-rate U.S. corporate income tax is under growing pressure as global investment capital has become more mobile.

This study looks at possible changes to address those problems. It identifies three goals for tax reform: simplification, efficiency, and limited government. The latter goal focuses on tax code features such as visibility and equal
treatment that cultivate an understanding of the high cost of government.

This study examines reform options including a flat tax, a national retail sales tax, and a savings-exempt tax in reference to those goals. It also proposes a new option: a “dual-rate income tax.” This revenue-neutral option would convert the individual income tax to a two-rate system that eliminates most deductions and credits and allows nearly all families to pay tax at a low 15 percent rate. A 27 percent rate would kick in for earnings above $90,000 (single) and $180,000 (married).

To promote growth, the maximum individual rate on dividends, interest, and capital gains would be 15 percent. The corporate tax rate would be dropped to 15 percent and interest made non-deductible. These changes would equalize and cut the combined top income and payroll tax rates on wages, dividends, interest, and small business income to just under 30 percent, compared with between 35 and 45 percent under current law.

The dual-rate tax plan would retain the standard deduction, an expanded personal exemption, and the earned income tax credit. The plan would create a simpler and more efficient tax code within the structure of today’s system and may be just the type of tax plan that the president’s advisory panel is looking for. ###

Taxing Sales Under the FairTax: What Rate Works?

In a 2006 paper entitled "Taxing Sales Under the FairTax: What Rate Works?", Paul Bachman, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck conclude that based on 2006 levels of government spending (which have subsequently increased) the required national sales tax rate would be 31.27% on a tax-exclusive basis. This tax would be in addition to existing sales taxes that generate revenues for state and local governments.

The Fair Tax - A 2007 Analysis by FactCheck.org

According to a FactCheck.org analysis of the Fair Tax (as proposed by presidential candidate Mike Huckabee in 2007):

We stand behind our earlier analysis of the FairTax. The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax. And it is revenue-neutral only through an accounting trick. It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.

The Fair Tax - What Advocates Say

According to the FairTax.org website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The FairTax:
Enables workers to keep their entire paychecks
Enables retirees to keep their entire pensions
Refunds in advance the tax on purchases of basic necessities
Allows American products to compete fairly
Brings transparency and accountability to tax policy
Ensures Social Security and Medicare funding
Closes all loopholes and brings fairness to taxation
Abolishes the IRS

The fairtax.org website does not explicitly say who will pay more in taxes under the Fair Tax proposal and who will pay less. A 2007 analysis by FactCheck.org provides the answer:

The Fair Tax “will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.”