Liberty Issues: Truth in Budgeting

Truth in Budgeting

The Medicare trust fund is subsidized by income tax revenues. So the Social Security trust fund lends money to the General Fund, which is then given to the Medicare trust fund!

Many critics claim Social Security is subsidizing general federal spending. But if we trace the dollars, Social Security is subsidizing Medicare. Or maybe not. Who knows?

As we approach election day, nearly a thousand candidates are seeking election to Congress. They've spent over a billion dollars researching what voters want to hear, then telling us what they think we want to hear. Party control of both the House and Senate may be at stake.

Yet, even when the stakes are this high, not one of these candidates - and neither political party - supports what may be the most popular issue in America ... Truth in Budgeting. Americans are nearly unanimous on this issue (on the few occasions it ever comes up): It's wrong to combine Social Security and Medicare with general tax revenues.

As an issue, this one may need to be nurtured. Voters believe it's wrong, but only in a very general sense. It sounds wrong. And it is wrong. Politicians won't change it because, as you'll see here, current budget practice permits bipartisan lying. If we had Truth in Budgeting, several core arguments of both political parties would be exposed as myths.

We can simplify the issue. Truth in Budgeting, at the federal level, means adopting the same discipline we recognize and demand at the local level ... a ''General Fund'' budget. We may not all know what the General Fund is, but we've heard the term. State and local officials use it all the time. Federal officials don't, because there is no federal General Fund - not publicly.

Instead, the federal government has a ''unified budget.'' Trust fund surpluses (like Social Security and Medicare) are thrown into the pot to make deficits look smaller. There's also a local-level term for that ... co-mingling trust funds. If local officials try that, to balance their operating budgets, we lynch them. Why do we tolerate it at the federal level?

Congress did address the issue - with a gimmick. A few years ago, they placed Social Security ''off-budget''... a totally meaningless act. Social Security can be on-budget, off-budget, or off the planet. But as long as Social Security surpluses are used to hide the real deficit, we're being deceived.

The deception began during the Johnson administration. A unified budget was adopted to hide the deficits of Vietnam. Today, both the general deficits and the trust fund surpluses are much bigger.

The deception is worse, and growing. In both political parties, co-mingling trust funds are a major component of budget proposals.

Liberty Issues was the first to expose ruinous deficits in Dick Armey's flat tax. Six weeks later, the Treasury Department confirmed what you saw here first. Some say Treasury's statement was purely political. The timing no doubt was. But you've seen the evidence.

Even Treasury didn't report the worst problem in Armey's bill. Armey's bill, and his party's Contract With America. Both propose cutting income taxes - paid for by cutting or capping entitlements. In other words: increase the General Fund deficit, then co-mingle higher trust fund surpluses and pretend you've done something.

If you don't understand the accounting principle, you should understand this. The trust fund surplus is temporary. Every penny is committed to future spending. In effect, it has been spent; they just haven't issued the checks yet. Over time, the surplus offsets ... nothing. Clinton budget proposals include the same hoax. Smoke and mirrors, and totally bipartisan.

Let's now review a campaign dispute. Republicans go ballistic when Democrats say Reaganbush (one word) cut taxes only on the rich. But it's true -- if we co-mingle trust fund revenues.

Republicans disagree, pointing to middle-class income tax cuts, in four separate years. Democrats co-mingle, by including six increases in FICA taxes (Social Security and Medicare). For a median income family of three, Reagan income tax cuts (plus indexing) were saving them $1,500 a year by 1990. But combined FICA tax increases had taken away virtually the same amount.

Thus, on combined federal taxes, it was only high-income taxpayers who ended the decade with a net tax cut.

Everyone got a cut in income taxes. But middle-income taxpayers then had to ''save'' their own government pension. That's the truth. But the truth has no partisan advantage. The truth doesn't win elections.

Here are a few more truths that we can't see, without the discipline of a General Fund:

The net FICA surplus grew by over $400 billion in the 1980s, which means real (general fund) deficits were $400 billion larger than either party will admit.
The Medicare trust fund is subsidized from income tax revenues, by over $50 billion per year. In effect, the Social Security trust fund lends money to the General Fund, which is then given to the Medicare trust fund!

Many critics claim Social Security is subsidizing general federal spending. Trace the dollars, and Social Security may be subsidizing Medicare. Or maybe not. Who knows?
In 1990, the Earned Income Tax Credit was increased for low-income workers. That was publicly intended, in part, to offset higher FICA taxes on these workers. (FICA taxes, with no deductions, are highly regressive.) Think about that. We give away income tax revenues, so these workers can pay higher FICA taxes. From the General Fund to the Trust Funds.
Cut through the smoke, and the end result is no different than a direct subsidy of Social Security and Medicare from income taxes.

Back in 1983, Congress ''saved'' Social Security by deciding to pile up surpluses for when the Baby Boomers retire. Critics said Congress could never keep their fingers off these massive surpluses. The critics were right, but may have underestimated the sheer ingenuity used to hide these thefts from the public.

I've constructed something close to a General Fund, for the Table in this article. It's not a true General Fund, because I want to focus on a single issue. What it shows is the net effect of the Reagan tax cuts and the military buildup on the deficit. Thus, I show only income taxes as revenues, and ignore several smaller general revenue taxes. So the deficit is not a true General Fund deficit, but it's a lot closer than the official published deficit.

Let's now examine a claim by Republicans, stated most often by Rush Limbaugh: ''The Reagan tax cuts stimulated the economy, causing tax revenues to double, which paid for the military buildup. Deficits increased because the Democrat Congress kept increasing social spending.''

That's the flip side of the Democratic version, also requires co-mingling, and is equally untrue. As shown by the Table, income tax revenues did not double. Gross revenues (not shown) roughly doubled, but that includes tax increases on Social Security and Medicare. (Republicans also ignore the 1982 tax increases, which were larger than the Clinton tax increase in both real constant dollars and as a percentage of GDP.)

Because inflation varied so greatly in that decade, the nominal (reported) dollars are deceiving. A dollar spent in 1980 was worth only 66 cents in 1989. So compare the ''1980$'' column, which restates everything in 1980 dollars.

As you can see, Mr. Limbaugh is wrong on all counts. The military buildup was not paid for - not with income taxes. And once the recession ended (1984-1989) domestic spending declined in real dollars (or increased slower than the inflation rate).

On the other hand, Democrats were wrong to attack this decline in domestic spending. If Democrats don't want to cut constant-dollar social spending, after the real worst recession in 50 years, then they never will.

It is true that income tax revenues increased faster than inflation, even after the Reagan tax cuts. The increase was $165.2 billion for the entire decade, or $280.7 billion after the recession.

Thus, if spending had been capped at the inflation rate, excluding Social Security and Medicare, the general fund deficit would have declined by over a quarter-trillion dollars, once the recession ended.

From a General Fund perspective, we can see how partisan politics increases federal deficits. When defense spending increases, caused by cold or hot wars, Republicans fight reflexively to keep that spending at crisis levels. When social spending increases, caused by recessions, Democrats fight reflexively to keep that spending at crisis levels.

We cannot dismiss this deception as mere political rhetoric. Because Republicans denied the military impact on deficits, they gave away the best argument against diverting the ''peace dividend'' elsewhere. One prudent approach might assume that (say) $500 billion in higher military spending was an ''investment'' that eventually permitted lower military spending when the Cold War ended.

In other words, we spent more in the short term, which then allowed us to spend much less after the Cold War ended.

Thus, $500 billion in peace dividends should have paid down the debt. $50 billion a year over ten years, or $25 billion over 20 years, plus interest. Whatever. That's what we should have done.

Watch closely. Republicans allowed Democrats to divert the peace dividend elsewhere - only because they want to divert it back again.

Without a General Fund budget, we don't even see the reality of it all. We'll never get real budget discipline, if politicians can create partisan alibis from the swirling smoke of a unified budget.