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

2014 Federal Budget in Pictures CUT SPENDING // FIX THE DEBT // REDUCE THE TAX BURDEN

About the Federal Budget in Pictures The Congressional Budget Office shows very clearly something we ve known for a long time: America s spending and debt are out of control. Now reaching $140,000 per American household, the national debt is bigger than what the entire U.S. economy produces in a year. U.S. public debt what the nation has borrowed in credit markets has doubled, as a share of the economy, since before the recession to levels not seen since around World War II. Why does the debt matter? Extensive research shows that this excessive debt burden 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 crucial that Americans understand what our 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. 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. Follow the money and another essential aspect is revealed: Medicare, ii

Medicaid, and Social Security make up 45 percent of our national budget. Millions of Americans rely on these programs, yet these programs are unaffordable and unsustainable because of outdated structures designed decades ago. Congress has yet to take the steps needed to reform and preserve these programs so they benefit those most in need and are affordable for taxpayers. The 2014 Federal Budget in Pictures helps Americans understand the severity of the nation s current fiscal situation. Lawmakers must make the 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 Out-of-Control Spending Is to Blame for America s Deficit Problem...3 Federal Spending Per Household Is on the Rise...4 National Defense Spending Would Plummet Under Obama s Budget...5 Entitlement Program Spending Is Massive...6 Two-Thirds of All Federal Spending Was Mandatory in 2013...7 Medicare s Relentless Growth Surpasses All Other Spending...8 FIX THE DEBT Each American s Share of the Public Debt Is Skyrocketing...12 What if a Typical Family Spent and Borrowed Like the Federal Government?...13 Publicly Held Debt Set to Skyrocket...14 Debt Limit Increases the Most Under President Obama...15 Federal Budget Deficits Will Reach Record Peacetime Levels...16 All Tax Revenue Will Go Toward Entitlements and Net Interest by 2030...17 Social Security Deficits Are Permanent and Set to Quadruple in Less Than 20 Years...18 iv

LOWER THE TAX BURDEN Top 10 Percent of Earners Paid 71 Percent of Federal Income Taxes...22 Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts...23 Obama Budget Would Push Tax Revenue Near Record High...24 U.S. Corporate Tax Rates Are the Highest in the Developed World...25 Within Two Decades, Social Security, Medicare, Medicaid, and Obamacare Will Claim 75 Cents of Every Tax Dollar...26 Obamacare Comes With a Barrage of Tax Hikes...27 v

CHANGES IN FISCAL POLICY have important effects on private business investment. Interestingly, the strongest effects arise from changes in primary government spending. [T]he surge in private investment that accompanies the large spending cuts during these episodes is exactly what one should expect. Alberto Alesina, Harvard University PUTTING THE BUDGET on a path to balance with spending cuts would spur economic growth by reducing uncertainty and by freeing up resources for investment and job creation. Romina Boccia, The Heritage Foundation

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

Where Does All the Money Go? In 2012, the major entitlement programs Social Security, Medicare, Medicaid, and other health care consumed 45 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. SHARE OF FEDERAL SPENDING IN 2012 45% Major entitlements Medicare, Medicaid, other health care: 23% Social Security: 22% 19% National defense 19% Income security and other benefits 6% Net interest Transportation 3% K 12 education 1% All other 7% Source: Office of Management and Budget. Note: Income security and other benefits includes federal employee retirement and disability, unemployment compensation, veterans benefits, food and housing assistance, and other federal income security programs. Cut Spending Chart 1 Federal Budget in Pictures 2014 2

Out-of-Control Spending Is to Blame for America s Deficit Problem PERCENTAGE OF GDP 32% 30% Federal spending is projected to grow at a rapid pace beyond the 10-year budget window. Without reforms, spending on interest on the debt, health care programs (Medicare, Medicaid, Obamacare, etc.), and Social Security will reach unsustainable levels. As a result, these spending levels will cause exploding deficits as tax revenues will be at their modern average level (1952 2008). 28% 26% 24% 22% 20% 18% SPENDING REVENUE Deficit Averages, 1952 2008: Spending: 20% Revenue: 18% 16% 2013 2015 2020 2025 2030 2035 2038 Source: Congressional Budget Office. Cut Spending Chart 2 Federal Budget in Pictures 2014 3

Federal Spending Per Household Is on the Rise Federal spending per household is projected to grow by 22 percent over the next decade, after adjusting for inflation. Federal spending per household more than doubled from 1962 to 2003. Spending grew by 17 percent just over the past decade. INFLATION-ADJUSTED DOLLARS (2013) $35,000 $30,000 $25,000 $20,000 $15,000 $24,300 $28,500 17% $34,600 22% $10,000 $5,000 $0 2003 2013 2023 Sources: Congressional Budget Office, Office of Management and Budget, and U.S. Census Bureau. Cut Spending Chart 3 Federal Budget in Pictures 2014 4

National Defense Spending Would Plummet Under Obama s Budget DEFENSE SPENDING AS A PERCENTAGE OF GDP 10% 1968: 9.5% Defense spending is on the decline under President Obama and is on track to fall to its lowest level as share of gross domestic product in 50 years. Maintaining U.S. global security commitments at such low levels is impossible. 8% 6% 4% 2010: 4.8% President Obama s budget 2001: 3% 2023: 2.4% 2% 0% 1962 1970 1980 1990 2000 2010 2020 2023 Source: Office of Management and Budget. Cut Spending Chart 4 Federal Budget in Pictures 2014 5

Entitlement Program Spending Is Massive Annual spending on Social Security, Medicare, Medicaid, and other health programs is massive compared to other federal spending priorities. There is too much waste and inappropriate spending in the discretionary budget as well, but Congress will not be able to rein in spending and debt without reforming the entitlement programs. ESTIMATED ANNUAL SPENDING IN 2014 TOTAL MANDATORY (Social Security, Medicare, Medicaid, other health care, and net interest) $2.54 TRILLION Foreign Aid $25 billion NASA $18 billion National Science Foundation $7.5 billion Source: Office of Management and Budget. Cut Spending Chart 5 Federal Budget in Pictures 2014 6

Two-Thirds of All Federal Spending Was Mandatory in 2013 Social Security, Medicare, and Medicaid, along with other entitlement programs such as food stamps, unemployment, and housing assistance, make up 60 percent of all federal spending. Including interest on the debt, the share of the budget that is mandatory spending is two-thirds. SHARE OF FEDERAL SPENDING IN 2013 60% 40% 20% 66% Net interest 6% Welfare programs and other entitlements 16% Medicare, Medicaid, and other health programs 22% Social Security 22% 34% All other spending 12% Defense 18% 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 2014 7

Medicare s Relentless Growth Surpasses All Other Spending Growing entitlement spending is to blame for America s long-term spending and debt crisis. Medicare will grow the fastest due to the aging of society and rising health care costs. SPENDING AS A PERCENTAGE OF GDP 12% 10% 8% 6% 4% Medicare All other non-interest spending Social Security Medicaid, CHIP, Obamacare exchange subsidies 2% 0% 2013 2020 2030 2040 2050 2060 2070 2080 2088 Source: Congressional Budget Office. Cut Spending Chart 7 Federal Budget in Pictures 2014 8

NO HOUSEHOLD CAN CONTINUALLY SPEND more than it makes. At some point, those who are financing the excess of the household s expenditures over its receipts will declare game over. The same is true of governments. The United States has spent decades playing take as you go, in which each generation of elderly takes from the young while promising the young their turn when old to expropriate from their own children. Laurence Kotlikoff, Boston University UNLESS WE CHANGE COURSE, continued massive government spending and the surging public debt will destroy the foundations of our economy and put the American Dream beyond the reach of our children and grandchildren. Rea Hederman, The Heritage Foundation

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 to spend much more than the nation can afford, every American will be on the hook for increasing levels of debt. Washington 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 $39,500 Share of debt for that child at age 24 $142,000 Share of debt for that child at age 18 $90,000 $25,000 2008: $19,900 2014 1970: $6,600 $0 1970 1980 1990 2000 2010 2020 2030 2038 Sources: Congressional Budget Office, Office of Management and Budget, and U.S. Census Bureau. Fix the Debt Chart 1 Federal Budget in Pictures 2014 12

What if a Typical Family Spent and Borrowed Like the Federal Government? Families understand that it is unwise to repeatedly spend much more than they take in. But Washington continues its shopping spree on the taxpayer credit card with seemingly no regard to the stack of bills the nation has already piled up. FIGURES BASED ON THE 2014 BUDGET The median family income in the U.S. is $51,000. If they spent money like the federal government, they d spend $60,500 a year...... which would mean they d put $9,500 on the credit card every year...... despite already being $300,000 in debt. Source: Congressional Budget Office. Fix the Debt Chart 2 Federal Budget in Pictures 2014 13

Publicly Held Debt Set to Skyrocket Runaway spending on Medicare, Medicaid, and Social Security will drive federal debt to unsustainable levels over the next few decades. Total national debt comprises publicly held debt (the most relevant to credit markets) and debt that one part of the government owes to another, such as the Social Security Trust Fund. 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 Sept. 11 terror attacks 2028: Passes 100% mark 2014: 74% 2038: 190% 0% 1913 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2038 Source: Congressional Budget Office. Fix the Debt Chart 3 Federal Budget in Pictures 2014 14

Debt Limit Increases the Most Under President Obama President Obama, after less than five years in office, has already increased the debt limit by more than any other president in U.S. history, including President George W. Bush over eight years in office. Without fiscal constraint, the debt limit would top $18.3 trillion by the end of Obama s term, increasing by another $1.2 trillion from today s level. GROWTH IN DEBT LIMIT BY ADMINISTRATION, IN TRILLIONS OF DOLLARS $5.4 $1.9 $1.8 $1.3 $0.21 $0.24 $7.0 $1.2 (projected) $5.8 (as of Oct. 17, 2013) Sources: Congressional Budget Office and Office of Management and Budget. Ford Carter Reagan Bush Clinton Bush Obama Fix the Debt Chart 4 Federal Budget in Pictures 2014 15

Federal Budget Deficits Will Reach Record Peacetime Levels Without reforms, spending on interest, Medicare, Social Security, Medicare, and other health care programs will drive deficits to catastrophic levels. DEFICITS AS A PERCENTAGE OF GDP 20% 15% 10% 2009: 10.1% 2049: 19.4% 5% Historical average (1962 2008): 2.2% 0% 1962 1970 1980 1990 2010 2020 2030 2040 2049 2000: 2.4% Sources: Congressional Budget Office and Office of Management and Budget. Fix the Debt Chart 5 Federal Budget in Pictures 2014 16

All Tax Revenue Will Go Toward Entitlements and Net Interest by 2030 In less than two decades, all projected tax revenues would be consumed by three federal programs (Medicare, Social Security, and Medicaid, which includes CHIP and Obamacare) and interest on the debt. Entitlement reform is a must. PERCENTAGE OF GDP 25% 20% REVENUES 15% 10% 2030: Entitlements plus interest consumes ALL tax revenues Net Interest 18.1% Medicaid, Obamacare Subsidies, CHIP Social Security 5% Medicare Actual Projected 0% 1970 1980 1990 2000 2010 2020 2030 2040 2040 Sources: Congressional Budget Office and Office of Management and Budget. Fix the Debt Chart 6 Federal Budget in Pictures 2014 17

Social Security Deficits Are Permanent and Set to Quadruple in Less Than 20 Years Social Security began running deficits in 2010, paying out nearly $50 billion more in benefits than the program received in payroll taxes. Without reforms, Social Security s deficits will rise rapidly and will quadruple in less than 20 years. INFLATION-ADJUSTED DOLLARS (2013) $100 $0 1987 1990 1995 2000 2005 $100 $200 2010 2015 2020 2025 2030 2013: $74.6 billion deficit SURPLUS DEFICIT $300 2032: $322 billion deficit Source: Social Security Administration. Fix the Debt Chart 7 Federal Budget in Pictures 2014 18

BY IMPOSING THE HIGHEST STATUTORY CORPORATE TAX RATE IN THE INDUSTRIAL WORLD, American politicians have created a head start program for every nation we compete with. This costs jobs and lowers the incomes of American workers. It s one of the costs we bear from runaway government and debt. Cutting spending and tax rates would help the poor and middle class improve their living standards. Stephen Moore, The Heritage Foundation TAX REFORM ENCOURAGES GROWTH by removing the barriers to engaging in productive activities: working, saving, investing, and taking on risk. It achieves lower tax rates and revenue neutrality by broadening the tax base. Curtis Dubay, The Heritage Foundation

Lower 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 71 Percent of Federal Income Taxes Top earners are the main target of tax increases, but the federal income tax system is already highly progressive. The top 10 percent of income earners paid 71 percent of all federal income taxes in 2010, though they earned only 45 percent of all income. The bottom 50 percent paid 2 percent of income taxes, but earned 12 percent of income. SHARE OF FEDERAL INCOME TAXES AND INCOME EARNED IN 2010 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% 11% 15% 19%... and paid this share of all federal income taxes. 2% Top 1 % 11% 16% 12% 22% 37% Source: Internal Revenue Service. Lower the Tax Burden Chart 1 Federal Budget in Pictures 2014 22

Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts Despite the top individual tax rate fluctuating between 91 percent and 28 percent over the past 50 years, total individual receipts have remained fairly stable. The top rate was last increased in 2013 and is now at 39.6 percent. TOP TAX RATE AND TOTAL RECEIPTS 100% 91% 80% 60% 40% 70% 50% 28% Top Individual Tax Rate (% income) 39.6% 39.6% 39.6% 20% Total Individual Tax Receipts (% GDP) 7.9% 9.4% 7.9% 8.1% 10.2% 7.7% 7.6% 0% 1960 1970 1980 1990 2000 2010 2013 Source: Internal Revenue Service. Lower the Tax Burden Chart 2 Federal Budget in Pictures 2014 23

Obama Budget Would Push Tax Revenue Near Record High PERCENTAGE OF GDP 22% Record high: 20.6% in 2000 Actual Projected After falling steeply during the Great Recession, tax revenues are growing beyond their historical average level. If President Obama s budget were enacted, tax revenues would approach the highest tax burden in history. 20% 18% 2023: 20% Obama budget Current law Alternative Fiscal Scenario Historical average: 18% 16% 2010: 15.1% 14% 1990 1995 2000 2005 2010 2015 2020 2023 Sources: Congressional Budget Office and Office of Management and Budget. Lower the Tax Burden Chart 3 Federal Budget in Pictures 2014 24

U.S. Corporate Tax Rates Are the Highest in the Developed World COMBINED CORPORATE TAX RATES 40% 37.0% 39.1% The U.S. total corporate tax rate is at 39.1 percent, the highest corporate tax rate in the developed world. The high rate reduces investment in the U.S. and costs American workers jobs and higher wages. 30% 20% 10% 12.5% OECD Average (excl. U.S.): 25.1% 23.0% 24.2% 26.1% 30.0% 0% Ireland United Kingdom South Korea Canada Mexico Japan United States Source: Organization for Economic Co-operation and Development (OECD). Lower the Tax Burden Chart 4 Federal Budget in Pictures 2014 25

Within Two Decades, Social Security, Medicare, Medicaid, and Obamacare Will Claim 75 Cents of Every Tax Dollar Spending on Social Security, Medicare, Medicaid, and Obamacare is growing rapidly. These programs make up more than half of tax revenue in 2014. By 2032, these programs will claim 75 percent of all projected tax revenues. SPENDING AS A PERCENTAGE OF TAX REVENUE 100% 50% 57% 11% 17% 28% 62% 14% 19% 29% 75% 17% 24% 34% Medicaid Medicare Social Security 0% 2014 2023 2032 Source: Congressional Budget Office. Lower the Tax Burden Chart 5 Federal Budget in Pictures 2014 26

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 American families 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. Lower the Tax Burden Chart 6 Federal Budget in Pictures 2014 27

28 Technical Notes The charts in this publication are based primarily on data available as of January 2014 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of federal spending, revenue, and debt to 2012, while the charts using CBO data show both historical and projected growth from as early as 1913 to as far as 2048. Projections based on OMB data are taken from the President s budget for fiscal year 2014. 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 is omitted for simplicity. Charts designating presidential Administrations begin with the year in which the Administration took office. Historical averages for spending and revenues in this publication span from 1952 to 2008, encompassing post-world War II and pre-great Recession years.

Authors Romina Boccia Grover M. Hermann Fellow in Federal Budgetary Affairs Michael Sargent Research Assistant in the Thomas A. Roe Institute for Economic Policy Studies John Fleming Senior Data Graphics Editor 29

Budget Trends Revealed in over 20 Shocking Charts FOR MORE THAN 10 YEARS, Federal Budget in Pictures has been an indispensable guide to understanding trends affecting every American family: rising government spending, soaring national debt and our growing tax burden. Now you can visualize and analyze these trends with expanded online tools: Download every full-color graphic to use in presentations or handouts Share charts on Facebook and Twitter with one click, plus a simple way to embed charts on your blog Get in-depth solutions from Heritage experts, tailored to every chart For the first time, get exclusive charts online not found in the print edition Don t miss breaking news on budget issues sign up for e-mail alerts from The Heritage Foundation Explore it now at /FederalBudget 214 Massachusetts Avenue, NE Washington, DC 20002 (202) 546-4400