Let's take a look at spending and where the money comes from by income quintiles.

Governments Spending Problem

The Peter G. Peterson foundation has an excellent discussion on Understanding the Budget and Understanding Revenues.

Over the coming decades, there will be a growing structural mismatch between revenues and spending. That mismatch poses significant challenges for our budget, as well as our political system. Politically, it is always easier to cut taxes and increase spending than it is to raise taxes and cut spending. Yet addressing our growing debt will require policymakers to face those choices, and delay will make them even more difficult.

Debt vs Deficit

Every year the US spends more than it takes in. The lead chart shows a surplus in 2000 but it's a mirage.

Every year national debt rises more than the alleged deficit because deficits ignore unfunded liabilities like Social Security. 

Understanding Revenue

Income Tax Discussion

Income taxes account for half of government revenue. 

"In 2019, the top quintile of earners paid 87 percent of all individual income taxes, while people in the lowest income quintiles had negative income tax liabilities (that is, on average, they received more in refundable tax credits than they owed in income taxes)."

Please read that again again until it sinks in. 

Corporate Taxes

"In 2019, most corporate income was taxed at 21 percent at the federal level. When combined with state and local corporate taxes, the average statutory tax rate was 25.9 percent. Corporate taxes amount to approximately 7 percent of all tax revenues, or approximately 1 percent of GDP."

For all the current brouhaha over corporate income taxes, those taxes only brought in 7% of government revenue (But please see my note below on payroll taxes for a better understanding of what's really happening). 

Tax hikes will bring in little additional revenue while encouraging more business flight to low-tax nations. 

This is why Treasury Secretary Janet Yellen Seeks a Global Minimum Corporate Tax. 

Payroll Taxes

Payroll taxes fund Social Security, Medicare, and unemployment insurance. 

"For Social Security, employers and employees each contribute 6.2 percent of every paycheck, up to a maximum amount ($132,900 in 2019 and adjusted for average wage growth each year thereafter). For Medicare, employers and employees each contribute an additional 1.45 percent with no salary limit. The Affordable Care Act added another 0.9 percent in payroll taxes on earnings over $200,000 for individuals or $250,000 for couples. Employers also pay the federal unemployment tax, which finances state-run unemployment insurance programs. Total revenues from payroll taxes is approximately 6 percent of GDP."

Corporations provide about half of payroll taxes. Effectively this is a tax on corporations that is not properly identified.

Looked at in this manner, corporations provide about 25% of federal government revenue, not 7%. 

As a side note, the self-employed including me, fund unemployment programs but we are not generally eligible for benefits, with the Covid-recession the only exception. 

Income Tax Exclusions

Income tax exclusions and tax deductions subtract from gross taxable income.

Interest paid on home mortgages is one such example. In reality, government has no business promoting one form of housing or another.

Eight popular exclusions account for nearly a trillion dollars in lost revenue. 

US Debt Clock

The Debt Clock shows US debt is over $28 trillion. 

Interest on national debt, even at these low rates, will top military spending as an expense item within a few years.

Progressive Taxes 

The bottom 40% get more back income credits than they paid in. 

The bottom 80% pay more in payroll taxes than they do income taxes. 

If Congress truly wanted to offer a middleclass tax cut it would focus in this area.

Mish Proposal

Rather than revise the code, I suggest we scrap the code entirely and go to combination flat tax above a certain income level plus a national sales tax excluding food, medicine, and other essentials.

This would be more fair and less regressive than the current 6,550+- pages of tax code written by lobbyists primarily for the benefit of special interest groups and the wealthy. 

The real problem however is spending. For starters, I would cut military spending in half and call it a start. 

I would rather have spent trillions of dollars on infrastructure than wasted trillions of dollars in stupid Mideast wars.

The US cannot afford to be the world policeman and should not try.

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD slips below 1.2050 amid dollar strength

EUR/USD is trading below 1.2050, losing some of its gains as the dollar shrugs off the fresh drop in yields and rises. European regulators said the benefits of J&J's vaccine outweigh the risks.


GBP/USD retreats from 1.40 despite upbeat UK job figures

GBP/USD is extending its falls after retreating from 1.40 as the dollar edges higher. Earlier, the UK reported a drop in the unemployment rate to 4.9%, better than expected. The Claimant Count Change also beat estimates with 10.1K. 


XAU/USD tests key Fibo resistance at $1,775

XAU/USD rebounds after closing in the negative territory on Monday. 10-year US Treasury bond yield is edging lower on Tuesday. Additional gains are likely if gold manages to clear $1,775 resistance.

Gold News

Ethereum price on cusp of massive breakout if key level holds

Ethereum price had a significant 23% correction in the past week but holds above a key support level on the 12-hour chart. The digital asset still has robust on-chain metrics supporting it and aims for a rebound.

Read more

S&P 500 (SPX) Update: Equity markets take a well deserved breather, crypto stocks slide

Equity markets took a much-needed break from setting record highs on Monday. Tesla suffered a steep 5% fall after reports of a crash with no one at the wheel. Have a Coke and a smile was up 1% as KO smashed earnings estimates.

Read more