Federal Budget in Pictures CUT SPENDING // FIX THE DEBT // REDUCE THE TAX BURDEN$

2015 Federal Budget in Pictures CUT SPENDING // FIX THE DEBT // REDUCE THE TAX BURDEN$

2015 Federal Budget in Pictures CUT SPENDING // FIX THE DEBT // REDUCE THE TAX BURDEN Thomas A. Roe Institute for Economic Policy Studies of the Institute for Economic Freedom and Opportunity Copyright 2015 The Heritage Foundation

About the Federal Budget in Pictures The Congressional Budget Office shows very clearly something we ve known for a long time: Higher spending is driving deficits and debt to unsupportable heights. The public debt is already at $41,000 for every American; a child born in 2015 will be faced with a $142,000 share of the debt by the time he or she leaves college. U.S. public debt has doubled since before the Great Recession, reaching levels not seen since shortly after World War II. Why does the debt matter? Extensive research shows that excessive debt harms job growth and ultimately lowers Americans personal incomes. Unless America changes course soon, younger and future generations will inherit a massive national debt and a less prosperous nation. It is critical that Americans understand what the nation s spending, debt, and taxes mean for them and their families as well as what solutions can point the way forward. The Heritage Foundation s Federal Budget in Pictures offers a unique tool to learn about these vital issues in a clear, compelling way. The federal government has borrowed to finance much of the spending growth over the past two decades. Yet when the Government Accountability Office and others independently evaluate government programs, the reports too often show spending being wasted on duplicative and ineffective government programs. Moreover, the federal government has become bloated, intruding in areas better handled by the private sector and state and local governments. Dealing with government waste, fraud, and inappropriate spending is crucial one key element of budget reform. This includes eliminating ii

programs that favor well-connected individuals and groups at the cost of the general public. Another essential aspect of reform is readily evident simply from looking at the budget: Medicare, Medicaid, and other health care programs, together with Social Security, make up 51 percent of the federal budget. Millions of Americans rely on these outdated, unsustainable programs that were designed decades ago. Congress has yet to take the steps needed to reform these programs to benefit those most in need, while being affordable for taxpayers. The 2015 Federal Budget in Pictures helps Americans understand the severity of the nation s current fiscal situation. Lawmakers must make tough choices to cut government spending, just as American households have trimmed back their own unnecessary spending in recent years. We can change the nation s current course, support a budget based on real constitutional priorities, and unshackle the enormous power of free people to create jobs, wealth, and prosperity. iii

Table of Contents CUT SPENDING Where Does All the Money Go?...2 Higher Spending Drives America s Deficit Crisis...3 Federal Spending per Household Is on the Rise...4 National Defense Spending Would Plummet Under Obama s Budget...5 Entitlement Reform Is Necessary to Rein in Spending and Debt...6 Two-Thirds of All Federal Spending Went to Entitlement Programs in 2014...7 Total Social Security Benefit Payments Are Growing Rapidly...8 FIX THE DEBT Each American s Share of the Public Debt Is Skyrocketing... 10 What if a Typical Family Spent and Borrowed Like the Federal Government?... 11 Publicly Held Debt Set to Skyrocket... 12 Federal Budget Deficits Will Reach Record Peacetime Levels... 13 All Tax Revenue Will Go Toward Health Care, Social Security, and Net Interest by 2031... 14 Social Security Deficits: Permanent and Growing... 15 Congress Should Cut Spending Before It Considers Raising the Debt Limit... 16 iv

REDUCE THE TAX BURDEN Top 10 Percent of Earners Paid 68 Percent of Federal Income Taxes... 18 Low- and Middle-Income Americans Get Hit with the Payroll Tax... 19 How Government Transfer Payments Affect Net Tax Rates... 20 Raising Tax Rates Does Not Necessarily Lead to Higher Tax Receipts... 21 U.S. Corporate Tax Rates Are the Highest in the Developed World... 22 Cumulative Payroll Taxes Consume 15.3 Percent of Workers Paychecks... 23 Obamacare Comes With a Barrage of Tax Hikes... 24 v

Cut Spending Spending is growing and will hit record levels without restraint, threatening economic freedom.

Where Does All the Money Go? In 2014, the major entitlement programs Social Security, Medicare, Medicaid, and other health care programs consumed 51 percent of all federal spending. These programs, and interest on the debt, are on track to consume an even greater share of spending in future years, while the portion of federal spending dedicated to other national priorities will decline. SPENDING AS A PERCENTAGE OF THE 2014 BUDGET 51% Major entitlements Medicare, Medicaid, other health care: 26.3% Social Security: 24.3% 19% Income security, other benefits 17% 7% National defense Net interest Transportation 3% K 12 education 1% All other 3% Source: Office of Management and Budget. Notes: Figures have been rounded. Income security and other benefits includes federal employee retirement and disability, unemployment compensation, food and housing assistance, and other federal income security programs. Cut Spending Chart 1 Federal Budget in Pictures 2015 2

Higher Spending Drives America s Deficit Crisis Federal spending is projected to grow at a rapid pace beyond the 10 year budget window as spending on interest on the debt, health care programs (such as Medicare, Medicaid, and Obamacare), and Social Security reach unsustainable levels without reforms. Deficits will explode because of higher spending, even as tax revenues exceed their average historical level. PERCENTAGE OF GDP 32% 30% 28% SPENDING 26% 24% 22% 20% REVENUE 18% 16% Deficit 2014 2015 2020 2025 2030 2035 2039 Averages, 1952 2008: Spending: 19.3% Revenue: 17.5% Source: Congressional Budget Office. Cut Spending Chart 2 Federal Budget in Pictures 2015 3

Federal Spending per Household Is on the Rise Federal spending per household is projected to grow by 20 percent through 2023, after adjusting for inflation. Federal spending per household more than doubled from 1962 to 2003, and grew by 15 percent over the past decade. PER-HOUSEHOLD SPENDING IN INFLATION-ADJUSTED DOLLARS (2014) $35,000 $30,000 $25,000 $20,000 $15,000 1962: $11,792 2003: $24,220 Temporary stimulus spending 2014: $28,585 2023: $34,632 $10,000 $5,000 $0 1962 1970 1980 1990 2000 2010 2020 2023 Sources: Congressional Budget Office, Office of Management and Budget, and U.S. Census Bureau. Cut Spending Chart 3 Federal Budget in Pictures 2015 4

National Defense Spending Would Plummet Under Obama s Budget Defense spending is declining under President Obama and is on track to fall to its lowest level as a share of gross domestic product in 50 years. DEFENSE SPENDING AS A PERCENTAGE OF GDP 10% 8% 6% 4% 1968: 9.1% 50 year average (1965 2014): 5.0% President Obama s budget 2010: 4.7% 2% 2001: 2.9% 2025: 2.3% 0% 1962 1970 1980 1990 2000 2010 2020 2025 Source: Office of Management and Budget. Cut Spending Chart 4 Federal Budget in Pictures 2015 5

Entitlement Reform Is Necessary to Rein in Spending and Debt Annual spending on Medicare, Medicaid, Social Security, and other mandatory programs is massive compared to other federal spending priorities. While there is too much waste and inappropriate spending in the discretionary budget, Congress must also make entitlement reform a top priority. ESTIMATED ANNUAL SPENDING IN 2015 TOTAL MANDATORY (Medicare, Medicaid, Social Security, other mandatory programs, and net interest) $2.6 TRILLION Foreign Aid $26.8 billion NASA $18.1 billion National Science Foundation $7.1 billion Source: Office of Management and Budget. Cut Spending Chart 5 Federal Budget in Pictures 2015 6

Two-Thirds of All Federal Spending Went to Entitlement Programs in 2014 Social Security, Medicare, Medicaid, welfare and other benefit programs, and interest on the debt made up 66 percent of federal spending in 2014. SHARE OF FEDERAL SPENDING IN 2014 60% 40% 66% Net Interest 7% Welfare programs and other entitlements 11% Social Security 24% 34% 20% Medicare, Medicaid, and other health care programs 25% All other spending 13% Defense 17% International affairs 1% Education and training 3% 0% MANDATORY SPENDING EVERYTHING ELSE Source: Office of Management and Budget. Cut Spending Chart 6 Federal Budget in Pictures 2015 7

Total Social Security Benefit Payments Are Growing Rapidly Since 1990, total Social Security benefit payments have more than doubled after adjusting for inflation. Disability benefits have been the fastest-growing segment, while Old-Age benefits are the largest and had the most growth in dollars. Total benefit payments are expected to continue growing rapidly as the large baby boomer generation enters retirement age, straining Social Security s financial resources. PAYMENTS IN BILLIONS OF INFLATION-ADJUSTED DOLLARS (2013) $800 $600 $400 $200 $0 1990: $397 billion 2013: $812 billion 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013 Survivors Insurance Disability Insurance and Dependents Old-Age Insurance and Dependents Source: Social Security Administration. Cut Spending Chart 7 Federal Budget in Pictures 2015 8

Fix the Debt Excessive spending is creating record levels of debt and the worst is yet to come, threatening opportunity and prosperity for younger generations.

Each American s Share of the Public Debt Is Skyrocketing As Washington continues spending well beyond its means, it is burdening Americans with increasing levels of debt. Congress must cut spending to fix the debt. PUBLIC DEBT PER CAPITA $150,000 $125,000 $100,000 $75,000 $50,000 Share of debt for a child born today $41,000 Share of debt for that child at age 24 $142,000 Share of debt for that child at age 18 $91,000 $25,000 1970: $6,675 2008: $20,782 2015 $0 1970 1980 1990 2000 2010 2020 2030 2039 Sources: Congressional Budget Office, Office of Management and Budget, and U.S. Census Bureau. Fix the Debt Chart 1 Federal Budget in Pictures 2015 10

What if a Typical Family Spent and Borrowed Like the Federal Government? If a median-income family spent and borrowed like the federal government does, it would spend $61,000 despite earning only $52,000. It would pile $9,000 on top of an already massive debt of more than $311,000 like having a mortgage, only without the house. FIGURES BASED ON THE 2014 BUDGET The median family income in the U.S. is $52,000. If it spent money like the federal government, it would spend $61,000 a year...... which means it would put $9,000 on the credit card every year...... despite already being $311,000 in debt. Sources: Congressional Budget Office, Treasury Department, and U.S. Census Bureau. Fix the Debt Chart 2 Federal Budget in Pictures 2015 11

Publicly Held Debt Set to Skyrocket Runaway spending, especially on Medicare, Medicaid, and Social Security, will drive federal debt to unsustainable levels. Total national debt includes publicly held debt or debt borrowed in credit markets and debt that one part of the government owes to another. Including intragovernmental debt, the national debt already exceeds the size of the nation s economic product (GDP). PUBLIC DEBT AS A PERCENTAGE OF GDP 200% 150% 100% 50% World War I Great Depression World War II 1946: 106% Great Recession, Stimulus, Bailouts 2028: Passes 100% mark 2015: 74% 2039: 183% 0% 1913 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2039 Sources: Congressional Budget Office and Office of Management and Budget. Fix the Debt Chart 3 Federal Budget in Pictures 2015 12

Federal Budget Deficits Will Reach Record Peacetime Levels Without reforms, growing spending especially for Medicare, Medicaid, Social Security, and other mandatory programs will drive deficits to catastrophic levels. Congress should cut spending and put the entitlements on a sustainable budget. FEDERAL DEFICITS AS PERCENTAGE OF GDP 20% 15% 10% 5% Historical average (1962 2008): 2.1% 2009: 9.8% 2050: 18.2% 0% 1962 1970 1980 1990 2010 2020 2030 2040 2050 2000: 2.3% Sources: Congressional Budget Office and Office of Management and Budget. Fix the Debt Chart 4 Federal Budget in Pictures 2015 13

All Tax Revenue Will Go Toward Health Care, Social Security, and Net Interest by 2031 In less than two decades, all projected tax revenues would go toward only health care (Medicare and Medicaid, including CHIP and Obamacare), Social Security, and interest on the debt. Entitlement reform is a must. PERCENTAGE OF GDP 25% 20% REVENUES 15% 10% 2031: Entitlements plus interest consumes ALL tax revenues Net Interest 18% Medicaid, Obamacare Subsidies, CHIP Social Security 5% Medicare Actual Projected 0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 Sources: Congressional Budget Office and Office of Management and Budget. Fix the Debt Chart 5 Federal Budget in Pictures 2015 14

Social Security Deficits: Permanent and Growing Social Security began running cash-flow deficits in 2010, paying out $51 billion more in benefits than the program received in payroll taxes that year. Without reforms, Social Security s cash-flow deficits will rise rapidly and will quadruple in less than 20 years, when its combined trust fund would be exhausted. INFLATION-ADJUSTED DOLLARS (2014) $100 $0 1987 1990 1995 2000 2005 $100 $200 2010 2015 2020 2025 2030 2014: $79.7 billion deficit SURPLUS DEFICIT $300 2032: $337 billion deficit Source: Social Security Administration. Fix the Debt Chart 6 Federal Budget in Pictures 2015 15

Congress Should Cut Spending Before It Considers Raising the Debt Limit Congress has raised the debt limit too many times without making substantive budget reforms to curb the growth of the debt. In recent years, Congress has suspended the debt limit altogether, most recently through March 15, 2015. When the debt limit is reinstated, it will exceed $18 trillion. Congress should adopt budget reforms that fix spending and debt instead of growing the debt without limits. DEBT LIMIT IN TRILLIONS OF CURRENT DOLLARS $18 $15 $12 $9 $6 $3 Increased by $5.6 trillion over 33 years Increased by $10.8 trillion over 12 years $17.2 trillion (last debt limit: Feb. 2014) $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Office of Management and Budget. Fix the Debt Chart 7 Federal Budget in Pictures 2015 16

Reduce the Tax Burden America s growing tax burden is a drag on the economy, hurting jobs and American international competitiveness.

Top 10 Percent of Earners Paid 68 Percent of Federal Income Taxes Top earners were the main target of recent tax increases under President Obama, but the federal income tax system is already highly progressive. The top 10 percent of income earners paid 68 percent of all federal income taxes in 2011 (the latest year available), though they earned 45 percent of all income. The bottom 50 percent paid 3 percent of income taxes, but earned 12 percent of income. SHARE OF FEDERAL INCOME TAXES AND INCOME EARNED IN 2011 This group of income earners... Bottom 50% Top 25% 50% Top 10% 25% Top 5% 10% Top 2% 5%... earned this share of all income... 12% 21% 22% 12% 15% 19%... and paid this share of all federal income taxes. 3% Top 1 % 11% 17% 12% 21% 35% Source: Internal Revenue Service. Note: Figures do not sum to totals due to rounding. Reduce the Tax Burden Chart 1 Federal Budget in Pictures 2015 18

Low- and Middle-Income Americans Get Hit with the Payroll Tax Payroll (FICA) taxes are levied on wages and salaries to fund the Social Security retirement and disability programs and part of the Medicare hospital insurance program (Part A). Average effective payroll tax rates are highest for individuals in the middle of the income distribution. TAX RATES BY INCOME GROUP (2014) 15% 10% 5% Lowest Quintile (< $24,191) 6.6% 2nd Quintile ($24,191 $47,261) 7.7% 3rd Quintile ($47,262 $79,521) 8.5% 3.7% 4th Quintile ($79,522 $134,266) 8.5% 6.2% 5.9% 15.1% 0% 1.0% Top Quintile ($134,267+) 5% 4.5% Average Effective Payroll Tax Rate Effective Individual Income Tax Rate Source: Tax Policy Center. Reduce the Tax Burden Chart 2 Federal Budget in Pictures 2015 19

How Government Transfer Payments Affect Net Tax Rates The top 20 percent of earners, on average, are the only income group to pay any substantive federal taxes (payroll, income, and others) when government transfer payments (Medicare, Social Security, Medicaid, and others) are included. NET TAX RATES IN 2011, BY INCOME GROUP 20% 10% 0% 10% Lowest Quintile (avg. earnings: $15,500) 2nd Quintile ($29,600) 3rd Quintile ($49,800) 14% 4th Quintile ($83,300) 1% 19% Top Quintile ($234,700) 20% 28% 30% 35% Source: Congressional Budget Office. Reduce the Tax Burden Chart 3 Federal Budget in Pictures 2015 20

Raising Tax Rates Does Not Necessarily Lead to Higher Tax Receipts TOP TAX RATES AND TOTAL RECEIPTS 100% 91% Although the top individual tax rate fluctuated between 91 percent and 28 percent over the past 50 years, total individual receipts have remained fairly stable as a percentage of GDP. The top rate was last increased in 2013 and is now at 39.6 percent. 80% 60% 40% 70% Top Individual Tax Rate (% income) 50% 28% 39.6% 39.6% 39.6% 20% Total Individual Tax Receipts (% GDP) 7.7% 9.1% 7.7% 7.9% 7.5% 9.9% 8% 0% 1960 1970 1980 1990 2000 2010 2014 Source: Internal Revenue Service. Reduce the Tax Burden Chart 4 Federal Budget in Pictures 2015 21

U.S. Corporate Tax Rates Are the Highest in the Developed World COMBINED CORPORATE TAX RATES (2014) 40% 37% 39.1% The U.S. total corporate tax rate at 39.1 percent is the highest corporate tax rate in the developed world, which reduces investment in the U.S. and costs American workers jobs and higher wages. 30% 20% OECD Average (excl. U.S.): 24.8% 21% 24.2% 26.3% 30% 30.2% 10% 12.5% 0% Ireland United Kingdom South Korea Canada Mexico Germany Japan United States Source: Organization for Economic Co-operation and Development (OECD). Reduce the Tax Burden Chart 5 Federal Budget in Pictures 2015 22

Cumulative Payroll Taxes Consume 15.3 Percent of Workers Paychecks Payroll (FICA) taxes fund the Social Security retirement and disability programs and part of the Medicare hospital insurance program (Part A). Without reforms, Medicare and Social Security spending threatens workers with higher payroll taxes. PAYROLL TAX RATES 16% 14% 12% 10% 8% 6% 4% 1965: Medicare enacted 6.25% 1956: Disability Insurance (SSDI) enacted 4% 1983: Social Security reform 13.4% 15.3% Hospital Insurance Disability Insurance Old-Age and Survivors Insurance 2% 0% 1937 1940 1950 1960 1970 1980 1990 2000 2010 2014 Source: Social Security Administration. Reduce the Tax Burden Chart 6 Federal Budget in Pictures 2015 23

Obamacare Comes With a Barrage of Tax Hikes Obamacare imposes numerous tax hikes, which total nearly $800 billion over 10 years. Obamacare s higher tax rates on income and investment will slow economic growth, leaving hard-working Americans and businesses worse off. OBAMACARE TAXES IN BILLIONS OF NOMINAL DOLLARS $120 $100 $80 $60 All other taxes Fee on medical device manufacturers Fee on pharmaceutical companies Tax on Cadillac plans Health insurance tax Individual and employer mandates $40 $20 Increase in Medicare HI tax and application to investment income for high earners $0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Sources: Congressional Budget Office and Joint Committee on Taxation. Reduce the Tax Burden Chart 7 Federal Budget in Pictures 2015 24

Technical Notes The charts in this publication are based primarily on data available from the Office of Management and Budget (OMB) as of February 2015 and the Congressional Budget Office (CBO) as of July 2014. The charts using OMB data display the historical growth of federal spending, revenue, and debt to 2015, while the charts using CBO data show projected growth to as far as 2089. Projections based on OMB data are taken from the President s budget for fiscal year 2016. The charts show annual data. Debt limit data are based on the limit in effect at the end of the calendar year. All spending and revenue data are based on the federal fiscal year. Prior to 1976, the fiscal year was from July 1 to June 30. That year, the current format of October 1 to September 30 was implemented. In the charts, the transition period is omitted for simplicity. Inflation adjustments are calculated using the deflators from OMB Historical Table 10.1: GROSS DOMESTIC PRODUCT AND DEFLATORS USED IN THE HISTORICAL TABLES: 1940 2019. Historical averages for spending and revenues in this publication span from 1952 to 2008, encompassing post World War II and pre Great Recession years unless otherwise indicated. 25

Authors Romina Boccia Grover M. Hermann Fellow in Federal Budgetary Affairs, Thomas A. Roe Institute for Economic Policy Studies, Institute for Economic Freedom and Opportunity Michael Sargent Research Assistant, Institute for Economic Freedom and Opportunity John Fleming Senior Data Graphics Editor 26

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