Let's Put the Federal Debt into Perspective

Last year, in the midst of federal debt crisis, I observed in a client newsletter (Let's Put the Federal Debt and Budget Crises in Perspective) that as painful as the fractious debate over raising the nation’s debt ceiling was, that I hoped it would underscore for Americans that getting our nation’s fiscal house in order should be job one. Yet, although politicians on today’s primary campaign trails loudly address the need to reduce spending, each year our federal government continues to spend far more than it collects in tax revenues.

For many in Congress, I suspect the numbers on the federal balance sheet may be so big that they become meaningless. In my newsletter, I suggested stripping away zeroes to try and make it possible to relate to the numbers and take action to reduce spending. MFS Funds has gone one better and produced a chart (If your budget resembled the U.S. Government) that really puts the federal budget in perspective. For example, if you made $100,000 last year and ran your household like the federal government, you would have spent nearly $160,000 and would be shouldering an accumulated dent of almost $650,000, more than six times your current annual earnings. Take a look:



Source: MFS Fund Distributors, Inc.

 Thinking in terms of our own budgets illustrates the financial stress our nation operates under and underscores the need for spending and tax reform.

Debating Tax Reform

“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it,” declared President Obama when he announced his deficit-reduction plan. “It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

The President’s reference to the Oracle of Omaha was a response to Buffett’s recent editorial in the New York Times where he noted that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office – and suggested that the rich should pay more in taxes.

In an interview with ABC’s Christiane Amanpour, Buffett clarified his views further when responding to her question on whether the wealthy need tax cuts to increase business activity and further economic growth. Said Buffett, “The rich are always going to say that, you know, 'Just give us more money, and we'll go out and spend more, and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”

Is the middle class paying more in taxes than millionaires? Remember, election season is heating up, so it’s worth doing some fact checking. According to data from the IRS quoted by the New York Times, in 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax. However, that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million. This year, those millionaires are expected to pay an average of 29.1 percent of their income in federal taxes, according to the Tax Policy Center. Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Yet, projections are just that. Taxes are determined based on where income comes from. Wages are taxed higher than capital gains, for example. Additionally, the tax code is riddled with deductions, exemptions and credits.

As the quest for the White House continues, I’m sure we’ll see tax figures spun a dozen different ways. Certainly, the debate over the “Buffett rule”--that suggests that people making more than $1 million a year should pay a larger percentage of their income in taxes than middle-class families pay--will continue. But it seems to me true tax reform will be a little more complicated than that.