Truth in Budgeting
1994-2010 by Michael J. Hihn and Liberty Issues. All rights
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
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
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
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
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.
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
- 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.
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
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
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
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
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
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
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
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