Public Finances

Tyrone Schiff Political Science 300 Societies are complex and fascinating entities in which to search for understanding. The different ways in which they manage, behave, and organize reveals a great deal about their core values, beliefs, and hopes. In order to evaluate societies, Joseph Schumpeter made the claim that “public finances are one of the best starting points for an investigation of society, especially…of its political life.” Schumpeter’s statement is valid in a political system like the United States, because, ideally, voting constituents elect officials to make decisions about public finances in their citizenry’s best interests. These governmental decisions that ought to echo the interests of its society include various key features of fiscal policy, such as taxes, outlays, tax expenditures, and the national debt. These examples provide some perspective on issues that are most pressing to a given society. However, the elected officials in power who enact these policies historically have had vastly different philosophies regarding their fiscal plans. This ongoing political divide between United States’ political parties illustrates Schumpeter’s claim that politicians and individuals in society are intrinsically linked to one another through public finances. The differing stance on taxes reveals the political divide in how to approach public finances. Current Presidential candidates, John McCain and Barack Obama, conservative and liberal, respectively, have vastly different ideas on tax policy.1 “The Obama plan would reduce taxes for low- and moderate-income families, but raise them significantly for high-bracket taxpayers… But, in sharp contrast to Obama, [McCain] would cut taxes for those in the top 1% by more than $125,000, raising their after-tax income an average 9.5 percent.”2 Quite clearly, public finances would be used 1

Williams, Roberton, and Howard Gleckman. 2008. "An updated analysis of the 2008 presidential candidates’ tax plans: Executive summary." Washington, DC: Tax Policy Center. 2 Ibid.

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Tyrone Schiff Political Science 300 significantly differently based solely on political ideology. This brings to mind just how important the role of voting in an election and choosing a public official is. Under current President, George W. Bush, the general tax trend of the last 30 years3 has continued; providing a larger after-tax benefit to the richest 1% of the United States.4 This has led to “a large increase in income inequality.”5 If public finances explore the on goings of political life, then one can reasonably infer that the general sentiment of the United States political movement has been to aggressively exploit the lower income tax brackets, while benefiting the higher brackets. This describes an illogical series of events. Even though the richest 1% of America represents a significantly smaller portion of the overall voting constituency, they have received a disproportionately greater benefit. America’s tax system reveals a biased political life favoring the rich and undermining the poor. Outlays describe how the government plans on budgeting and using the revenue they take in from taxes. One particular outlay, the war in Iraq, is highly controversial and has received criticism from New York Times columnist, David Leonhardt.6 Since it began, it has cost an estimated $1,200 billion, which Leonhardt argues could have been used on an, “unprecedented public health campaign… universal preschool… reconstruction funds… national security…and a peacekeeping force.”7 As a college student, I’m particularly annoyed by this outlay in relation to Student Loans, which will receive just $1 billion in 2009, and a combined amount of $30 billion between 2009 and 2018.8 While 3

Krugman, Paul. 2003. "The tax-cut con," New York Times Magazine (Sept. 14). Furman, Jason, 2007. "The effect of the 2001-06 tax cuts on after-tax incomes," testimony before the U.S. House Committee on Ways and Means, Sept. 6. Washington, DC: Brookings Institution. 5 Ibid. 6 Leonhardt, David. 2007. "What $1.2 trillion can buy," New York Times (Jan. 17). 7 Ibid. 8 Congressional Budget Office. 2008. The Budget and Economic Outlook: An Update (Sept. 9). "The Budget Outlook." 4

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Tyrone Schiff Political Science 300 this is a budgetary allotment, the decision to devote 200 times more resources9 to a militaristic endeavor over academic pursuit speaks volumes about American political priorities. Federal entitlement programs like Social Security, Medicare, and Medicaid received $1,260 billion in 2008, practically half of total tax revenue.10 These enormous entitlement programs are geared towards an older demographic. Perhaps the reason that the younger demographic does not get similar entitlements is simply due to the low voter turnout they have in comparison to the older demographic.11 This means that the older demographics issue’s are at the forefront of governmental thought. This example shows an undeniable link between society, political life, and public finances. Tax expenditures are special tax provisions that are essentially spending programs.12 In a given year, there is approximately $800 billion in tax expenditures.13 Maya MacGuineas, a Washington Post reporter, is adamantly opposed to the notion of tax expenditures, “They regularly pay people and businesses to do what they would do anyway, making them both poorly targeted and unnecessarily expensive.”14 These tax expenditures seem ineffective and unnecessary, yet similar to our discussion regarding taxes, much of the policy has been implemented to benefit the rich.15 For example, the biggest tax breaks in the United States, on home mortgages and healthcare vouchers, favor the upper income brackets.16 People who pay mortgages on housing receive tax breaks, but they are disproportionately uneven. While these 9

Ibid. at 6 Ibid. at 8 11 Lecture 9/22/2008 12 MacGuineas, Maya. 2007. "The $800 billion tax loophole," Washington Post (Jan. 18). 13 Ibid. 14 Ibid. 15 Ibid. 16 Ibid. 10

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Tyrone Schiff Political Science 300 expenditures are indeed raising revenue, MacGuineas points out their unfair nature and thus need for reform. It is critical to take note of the interplay that exists between society and politics and how it manifests itself in a distortion of public finances. The inequity in these programs is sometimes hidden very well, but they certainly do exist. The national debt is another factor in determining the status of public finances. A really interesting way to express the budgetary decisions made in relation to the swelling debt is the recent Wall Street bailout, which came into being via the Troubled Assets Relief Program.17 The bailout has inflated the debt by close to $1,000 billion in a matter of weeks, aiding the likes of Fannie Mae, Freddie Mac, AIG, and other troubled financial institutions.18 The current debt held by the public stands at $5,809 billion, an increase of $330 billion in just one month.19 The issue arising with debt is that in order to finance our current economic situation, the government chose to borrow from the future of America in order to do so. This necessary evil is intended to fix things in the present, but will place an enormous burden on the next generation to pay this loan back. One has to consider who the policy makers had in mind when deciding to borrow this money from the future and the youth of America? After examining taxes, outlays, tax expenditures, and the national debt it is clear that the government is in line for much needed budgetary reform to balance the budget and close the gap between the wealthy and the impoverished in society. The most critical step is to start with adjusting the initial tax rates that are being applied. I think the system needs to be completely overhauled. My proposition would be to segment the United 17

Troubled Assets Relief Program. Full Text. http://online.wsj.com/public/resources/documents/senatebillAYO08C32_xml.pdf 18 Rogoff, "America will need a $1,000bn bail-out," Financial Times. 19 National Debt Fun Facts. E-Mail. 10/3/2008

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Tyrone Schiff Political Science 300 States into 100 income categories, each one representative of 1% of average income dollars. This is necessary for a more specific scrutiny of the tax rate. Then, I would apply a representative tax rate on each 1% based on two factors. The first factor would be a detailed budget for fiscal year. The second factor would be the percentage that each 1% income category collectively owns as a proportion of the total dollars available in the American system. For instance, if the presumed budget for 2009 was determined by Congress to be $2,500 billion, and if the top 1% of America holds 45% of all money in the American system, then they would be responsible for 45% of the $2,500 billion, or $1,125 billion of the total. I think that the benefits of this budgetary reform would be significant and substantial. The tax rate would be far more focused because it targets every 1% increment in income and far more proportional to the burden that each household would have to contribute to an overall budget. It would also place fiscal responsibility on the government to come up with a budget and stick to it. I think the idea definitely needs to be explored further.

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