2013 US Federal Budget

 Interesting Facts & Implications

Wikipedia has an article on the 2013 US federal budget. Of particular interest are the last sections covering (a) 10-year projections and (b) total revenues and sending.

I will make some observations, ask some simple questions, and then proceed to answer them. The answers will be based on simple quantitative analysis. The observations and questions were originally posted in my previous blog.


Observations

Growth rates. The highest annual rate of increase among major tax revenue categories belongs to individual income taxes, at 8.4%. The highest annual rate of increase among major spending categories belongs to interest payments on Public Debt, at 14.2%.

Revenue composition. Corporations pay 12% of tax revenue while individuals pay 47%.

Expenditure composition. The top 5 spending categories in the federal budget account for 76% of spending and are, in descending order:

1. Medicare, Medicaid
2. Social Security
3. Defense
4. Interest payments on Public Debt
5. Agriculture

Questions

1. If interest payments on Public Debt are growing so fast, what does this mean in the long run? 
2. If corporations pay a smaller percentage of tax revenue than individuals, does this mean that individuals are disadvantaged?
3. How fast is the US federal budget growing relative to the general economy?

Answers

1. If interest payments on Public Debt are growing so fast, what does this mean in the long run? 

The intent of this question is to find out (a) what portion of the total federal budget is currently going toward interest payments and (b) how that portion is expected to change. If interest payments represent a large portion currently, then it means that less funds are available for other uses. If this portion is expected to increase, then it means that the squeeze on funds availability for other uses will only increase.

Answer: For 2013, interest payments on Public Debt represent 6.5% of the federal budget. By 2023, they are expected to represent 15% of the US federal budget. In relative terms, the interest payment burden is expected to more than double in 10 years.

Supporting calculations: (a) 2013 interest payments = $246 bn. 2013 federal budget = $3.803 tn. Ratio = $246 bn / 3.8 tn = 6.5%. (b) Interest payments' annual growth rate = 14.2%. Federal budget's annual growth rate = 5.0%. All figures from Wikipedia article cited at the top. Implied interest payments after 10 years = $246 x (1 + 14.2%)^10 = $928 bn. Implied federal budget after 10 years = $3.803 tn x (1 + 5%)^10 = $6.195 tn. Ratio = $928 bn / $6.195 tn = 15%.

Acronyms:
mn = million
bn = billion
tn = trillion

2. If corporations pay a smaller percentage of tax revenue than individuals, does this mean that individuals are disadvantaged?

This question is intended to provide insight into whether one category in society receives preferential treatment relative to another category.

Answer. It depends on one's perspective, and there are three perspectives.

1. From the tax recipient's perspective (i.e. the federal government), individuals represent a more significant contributor than corporations, and by a factor of 4 times: 47% of tax revenue comes from individuals vs. 12% from corporations.
2. From income earners' perspective, corporations pay a larger fraction of their income than individuals, and by a factor close to 2 times: 17% of corporate profits goes toward tax payments vs. 10% of individual income. 
3. From the perspective of foregone wealth in absolute terms, corporations pay less tax than individuals, and by a factor of more than 2 times: A shareholder (indirectly) pays $2,000 in corporate taxes vs. $5,000 paid in income taxes by an individual taxpayer, on average.

Long answer:

(Part 1) For the fraction of tax revenues paid by individuals vs. corporations, please see the Wikipedia article cited at the very top.

(Part 2) US individual income tax payments in aggregate represent 10% of aggregate individual income, as of 2012. On the other hand, US corporate income tax payments in aggregate represent 17% of aggregate corporate profits. From this viewpoint, the corporate income tax burden on beneficiaries is heavier than the individual income tax burden.

(Part 3) However, if a different metric is used and which is based on the number of individuals making tax payments, the picture flips. For those individuals who make an individual income tax payment, the average amount paid per individual is about $5,000. Similarly, for those individuals who benefit from corporate profits (by being shareholders), the average amount paid per shareholder is $,2000.

Supporting calculations: (Part 2) US aggregate individual income tax payments in 2012 = $1.359 tn (source: Wikipedia article cited at the very top), vs. US aggregate personal income in same year = $13.402 tn (source: BBER) Ratio = $1.359 tn / $13.402 tn = 10%. Aggregate corporate tax in 2012 = $348 bn (source: Wikipedia article cited at the very top, vs. US aggregate corporate profits in same year = $1.755 tn (source: St. Louis Fed). Ratio = $348 bn / ($348 bn + $1.755 tn) = 17%.

(Part 3) Regarding individual income tax, not all individuals make such payments. A good guess is that those below the poverty line don't make any individual income tax payments. If we adjust for this, out of a US population of 314 mn (as of 2012, source: US census), 14.3% are below the poverty level (same source, US census), leaving 269 mn as the number of individuals who pay individual income tax. Average individual income tax payment per person = $1.359 tn / 269 mn = $5,052, after rounding = $5,000.

Regarding corporate income tax, not all individuals are shareholders in corporations (and in businesses in general). The percentage of Americans who are corporate shareholders reached a 15-year low of 52% in May 2013 versus a peak of 65% in 2007 (source: Christian Science Monitor). Number of Us individuals who are corporate shareholders is therefore between 52% x 314 mn and 65% x 314 mn, or between 163 mn and 204 mn. Average corporate income tax payment per shareholder, higher value = $348 bn / 163 mn = $2,135. Lower value = $348 bn / 204 mn = $1,706. Average = $1,920. After rounding = $2,000.

Before moving on, I do acknowledge that the above analysis is simplistic. The next step would be to perform an analysis which first divides individuals by income level ...

3. How fast is the US federal budget growing relative to the general economy?

The intent here is to find out (a) the level of federal government activity relative to the entire economy and (b) how this relative level is expected to change.

Answer. The US federal budget in 2013 represents an amount equal to 23% of 2012 US nominal GDP. By 2023, this budget is expected to represent 26% - 32% of US nominal GDP.  If the US economy grows slowly, the actual figure will be closer to 32%, but if it grows quickly, the actual figure will be closer to 26%. It follows that the relative size of the federal budget is expected to increase by somewhere between 10% - 40% in 10 years, when measured relative to GDP.

Some takeaway nominal growth rates over the next 10 years:

• 7.6% p.a. tax revenues    -- p.a. = per annum
• 5.0% p.a. federal spending
• < 3.5% p.a. economic growth    -- my educated guess

Supporting calculations: (a) 2013 federal budget = $3.803 tn.2012 US GDP = $16.62 tn in nominal terms, i.e. in current dollars and without any adjustments for inflation (source: Wikipedia). $3.803 tn / $16.62 tn = 23%. (b) Implied federal budget after 10 years = $6.195 tn, as calculated for answer 1. We need to estimate nominal GDP growth rate for the next 10 years. Looking at various historical time horizons all ending with 2012, we see the following annualized growth rates for US nominal GDP: 10-years: 4.0%, 20-years: 4.6%, 30-years: 5.4%, 40-years: 6.5%, 50-years: 6.9% (source: multpl.com). For example, for the 10 year period ending with 2012, the 10-year historical growth rate of nominal GDP has been 4.0%. We observe that US GDP growth has been slowing down over the past 50 years, in nominal terms. (The real question is whether it has slowed down in real terms, but that's a suitable subject for a future blog.) 

For the next 10 years, I will assume that GDP growth rate will be between 1.5% and 3.5% per annum. We can now calculate US GDP after 10 years: $16.62 x (1 + 1.5%)^10 = $19.29 tn, lower bound. $16.62 x (1 + 3.5%)^10 = $23.44 tn, upper bound. We can now proceed to calculate the size of the US federal budget 10 years into the future relative to the general economy. Lower bound: $6.195 tn / $19.29 tn = 32%. Upper bound = $6.195 tn / $23.44 tn = 26%. Final comment. The federal budget is expected to grow at 5% p.a. (as per answer 1), whereas it is almost impossible for US nominal GDP to grow by as much as the same rate. The Wikipedia article cited at the very top also indicates that that tax revenues will grow at 7.6% p.a. over 2012-2022.


Final remarks. This kind of analysis -- all 3 questions -- can very well be performed for other countries and then be used to perform a cross-country comparison ....

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