Facebook Economics

My Esteemed Colleague posted some of Gore Vidal’s economic musings on Facebook, and I responded. I wasted so much time writing up my response that I thought it might be valuable to use it here, too. Here’s what he said first:

Gore Vidal : “In actual fact, close to 90% of the disbursements of the federal government go for what is laughingly known as “defense”. In 1986, the gross revenue of the government was …$500 billion.  Of the $500 billion, $286 billion went to defense ; $12 billion in foreign arms to our client states ; $8 billion to 9 billion for energy, which means, largely, nuclear weapons, $27 billion for veteran’s benefits, the sad and constant reminder of the ongoing empire’s recklessness ; and finally, $142 billion for interest on loans that were spent, over the past forty years, to keep the national security state at war, hot or cold. So of 1986’s $500 billion in revenue, $475 billion was spent on national security business.” In other words, almost NINETY PER CENT OF ALL FEDERAL INCOME GOES TO DEFENSE. Want to restore the economy? STOP THE WARS ; BRING THE TROOPS HOME ; END EMPIRE.

And here’s how I responded.

The problem with this is that it’s factually, provably incorrect. Reviewing the Congressional Budget Office numbers for fiscal year 2010, we spent $689 billion, which constitutes 20% of our total budget on defense.

Source: http://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables[1].pdf See table E-7.

Given that we had a federal deficit of over $1.5 trillion last year, i.e. $1,500 billion, eliminating the defense department entirely wouldn’t even cut the deficit in half, let alone balance the budget.

He then went on to say this, which he wrote before my response above:

There is ABSOLUTELY NO BUDGET CRISIS. Period. The ENTIRE “recession” is a SCAM. In 1950, 28% of the Federal Revenue came from corporate taxes ; in 1991, 8%. That tells you everything you need to know. Increase that 8% back up to 28%, and you’ll see that there’s plenty of money. Cut the Defense Budget by 2/3, and you’ll see that we’re all bathing in cash. It’s that simple. SHARE THIS POST.

Now, in 2011, the revenue from corporations is 6.6%. This is outrageous. Give us another 22 percentage points, and there will be no problem funding education, art, and all social programs.

And my response:

This strikes me as an exceptionally misleading and useless statistic. “Corporate taxes as a percentage of federal revenue” tells me nothing at all about how much we’re collecting in corporate taxes. Instead, it tells me how much we’re collecting in relationship to other revenue sources. How much were we collecting, for instance, in Medicare taxes in 1950? The answer is that we were collecting zero dollars, or “bupkus,” in Medicare taxes, since the program didn’t yet exist.

So once we did start collecting Medicare taxes, the amount of actual dollars in corporate taxes paid could have gone up and still been a smaller percentage of federal revenues. Today, we pay far more in Social Security taxes as a percentage of federal revenue than we did in 1950, a time when people died younger and we paid far fewer Social Security benefits. In addition, in 1950, the tax rate for Social Security was about 2%. In 2011, it’s now 6.5%, or, for self-employed people like me, 14%. That’ll reduce the ratio right there. Certainly we pay more than bupkus in Medicare taxes.

So how do we measure corporate taxes, then? Are they slacking off?

For the answer, you have to review the boring numbers again. According to CBO tables – http://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables[1].pdf – see table E2 – corporations paid $26.8 billion in taxes in 1971. Almost forty years later, in 2007, they paid $370.2 billion, well over ten times what they paid four decades earlier. Of course, that number’s vastly misleading, too. Not only does inflation monkey with how much those dollars are actually worth, but there are a buttload of new corporations that exist in 2007 that didn’t exist in 1971, so, of course, the figure is higher.

So what statistic isn’t misleading?

I think the answer is on table E-4. That tells us how much corporations are paying as a percentage of the total gross domestic product. In other words, we have a fixed point of comparison that allows us to compare apples to apples. In 1971, corporate tax revenues constituted 2.5% of GDP. In 2007, they constituted 2.7%. The numbers fluctuate according to the health of the economy, but overall, corporate tax income to the federal treasury has been remarkably stable.

So what if we apply your prescription? Let’s wave a magic wand and make sure that corporations provide 28% of all federal revenues in a balanced budget.

We spent $3,455 billion in 2010. (See Table E-5.) For corporations to fund 28% of that, they’d have to cough up almost a trillion dollars, whereas they only paid $191.4 billion in 2010. So they’d have to see their taxes rise by a whopping 500% in order to meet their quota.

Except that won’t work, because two things inevitably happen when you increase an American corporation’s tax burden by 500%. One is that, with such a heavy tax burden, they will produce a whole lot less, and so even if their tax rate is quintupled, you’re not going to get anywhere near quintuple the revenue. But number two is the more likely scenario – they will stop being an American corporation. They will either shut their doors or go overseas. In all likelihood, if you multiplied the American tax burden by five, the federal government would get far less revenue than it’s getting now.

It’s also interesting to note that your evidence that the “ENTIRE ‘recession’ is a scam” presupposes that the federal budget and the recession are the same thing. They are not. At all. You can balance the budget and even pay off the entire debt and still have a recession. The economy is not a product of the federal government, something that Washington can turn on or off with the flick of a switch.

That is all.

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