Your tax dollars at work???

Einstein once said, “The hardest thing to understand in the world is the income tax.”

While there is not much we can do to help you better understand the filing process, we can help you understand how your tax dollars are being spent. The chart below shows how tax revenue is divided up among federal programs. The problem is that all of this tax revenue doesn't even come close to covering the government’s costs; each one of us would need to cough up another 24% in taxes just to pay for what we borrowed in 2013.

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A Brief Overview of Rep. Paul Ryan's FY15 Budget Proposal

Representative Paul Ryan (R-WI), Chairman of the House Budget Committee, introduced a fiscal year 2015 budget proposal today and is expected to hold a committee vote on it tomorrow.  The proposed budget would eliminate the deficit by 2024, largely through $5.1 trillion in spending cuts.

A substantial portion of the spending cuts stem from the repeal of Obamacare, which would save, according to the proposal, over $2 trillion. The inclusion of this provision makes the proposal politically unrealistic, as the bill won’t be brought up for consideration in the Senate. The proposal achieves additional savings through cuts in discretionary spending and through reforms to mandatory spending programs, specifically Medicare and Medicaid. Left out of the budget is a proposal to reform Social Security, which is set to payout reduced disability benefits in 2016 and reduced retirement benefits in 2033.

While Mr. Ryan’s budget outline principles for comprehensive tax reform, it does not present a specific proposal; that would need to be (and has been) done out of the House Ways and Means Committee. Nevertheless, the proposal assumes that, in 2024, the government will receive $4.926 trillion in revenue and will spend $4.995 trillion. After including $74 billion in additional deficit reduction through economic growth, something not included in previous proposals, Mr. Ryan’s budget is projected to result in a $5 billion budget surplus in 2024.

Although it’s encouraging to see a budget proposal that includes some mandatory spending reform and produces a surplus within 10 years, the proposal is politically unrealistic this year. Furthermore, the exclusion of Social Security reform and additional cuts to discretionary spending further impacts our generation in the long-term. 

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Arbitrary Defense Cuts Don't Solve our Long-Term Budget Woes

Two weeks ago, President Obama submitted his fiscal year 2015 budget request to Congress, which included funding for the Department of Defense. The department’s budget request includes a number of cost reductions achieved through efficiencies, personnel cuts, and reducing weapon modernization programs.  These cuts are necessary for the department to comply with the $496 billion spending cap included in last year’s Bipartisan Budget Act, which is $75 billion less than the President’s request last year. While efforts to improve department efficiencies and reduce waste in weapon systems acquisitions are surely needed, across the board spending cuts that are not rooted in our strategic defense objectives negatively impact our national security while achieving little in long-term deficit reductions.  

Rather than addressing entitlement reform and comprehensive tax reform, the President and Congress have sought to achieve deficit reduction through discretionary spending cuts, particularly in the Department of Defense.  Last year’s irresponsible, across the board sequester cuts reduced DoD’s budget by $37 billion in 2013 alone. Those cuts were in addition to the $487 billion, over 10-years, in spending reductions required by the Budget Control Act of 2011.  While our defense strategy development must include the availability of resources, implementing these arbitrary spending cuts has resulted in cost saving measures that hurt our military’s ability to carryout its strategic objectives.

Secretary of Defense Chuck Hagel announced that the budget proposes reductions across the department and services, including reducing the size of the Army to 440-450,000 soldiers, eliminating the U-2 aircraft, and reducing the operating budget of DoD’s main headquarters by 20%. The budget also requires reductions in military personnel compensation, including “limiting pay raises, slowing the growth in tax-free housing allowances, phasing out the federal subsidy for U.S. military commissaries, and consolidating TRICARE [the military’s healthcare system] in ways that incentivize using the most affordable medical care available”, which will save $11 billion over 5-years. In addition, the department has said that, given the resource constraints and corresponding reductions to personnel and weapon systems, it can reduce 25% of its infrastructure through a 2017 Base Realignment and Closure (BRAC).

Even after these reductions, the department’s budget request exceeds the BBA by $26 billion, which the President is requesting be added to a new opportunity growth and security fund. The FY15 request also includes an additional $115 billion, over 5-years, beyond the sequester cuts set to return in 2016. According to Acting Deputy Secretary of Defense Christine Fox, “The size and timing of sequester-level budget cuts make it impossible for the department to reduce overall spending without harming readiness…The military’s technological edge will be placed at risk due to delayed and cancelled investments in modernization.”

Congress has willingly imposed these tight resource caps on DoD and left it to the department to adjust its spending to fall within the arbitrary caps. Yet, when the department announces reductions to personnel and identifies programs and systems it can no longer sustain under the spending caps, members of Congress are the first to cry foul. Numerous members of Congress have come out in opposition to specific weapon system cuts and have stated that the proposed 2017 BRAC is dead on arrival, even though the 2005 BRAC, according to Ms. Fox, has saved DoD $4 billion annually. 

That’s not to say that the proposed reductions and eliminations in DoD’s budget should go uncontested. There are smart, strategic ways to reduce the Pentagon’s budget that also align with providing our military with the resources and capabilities to carryout our national defense objectives. But it’s difficult to support a member’s opposition to proposed cuts when it was Congress that imposed the arbitrary spending caps that the department must live under.

According to a recent Pew Research poll, only 28% of Americans favor reductions in defense spending. Moreover, we could cut every dollar of discretionary spending and still have to contend with massive mandatory spending obligations. So why do our elected officials continue to attempt to reduce the deficit solely through cuts to defense and other critical discretionary programs? It seems that the answer lies with their unwillingness to address the true drivers of our deficit, entitlement programs and an outdated tax code.

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TCKB Analysis of the President's FY15 Budget

Yesterday President Obama released his Fiscal Year 2015 budget proposal.  Here are some key facts of the President's $3.9 trillion budget: 

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  • The 10-year projection for the budget would bring the deficit down to a low of $413 billion in 2018 before increasing again in 2019 and beyond
  • Proposes $651 billion in additional revenue, including a 30% minimum income tax on “wealthy millionaires”
  • $623 billion in total defense spending
  • $563 billion in total non-defense discretionary spending (ex. education, research and infrastructure)
  • $2.458 trillion in non-interest mandatory spending (includes programs like Social Security and Medicare)

The budget’s emphasis on investing in infrastructure spending is welcome news for our generation. As we noted in a blog post last week, our infrastructure is in critical need of repair. According to a recent NYTimes article, we need a $3.6 trillion investment to fully repair our nation’s roads and bridges. While the President’s proposal is only 1/10 of that, it is a much-needed step in the right direction.

What’s discouraging about the proposal is that we continue to favor spending on mandatory programs over investing in our future. In 2015, discretionary spending will be less than half of mandatory spending. In fact, the budget touts cuts in discretionary spending to reduce the deficit but only achieves $80 billion in savings in mandatory spending over the next 10 years.  While these proposed savings come from cuts in prescription drug costs, among other things, there are no proposals that would put entitlement programs on a sustainable path. In addition, by 2020, interest on the debt will be more than we spent on education, R&D and infrastructure in 2012.  

The President was absolutely right when he said that, “Our budget is about choices”. Unfortunately, Washington is choosing to under invest in the future and is short-changing our generation in the process.

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