Tax Day 2019: How the Government Spends Your Money

Plus, Americans aren’t buying the Trump tax cuts

Tax Day 2019: How the Government Spends Your Money

Happy Tax Day! You’ve probably already filed your return for 2018, or at least most taxpayers have. The IRS says that it received more than 103 million returns by April 5 — and issued nearly 78 million tax refunds totaling $220.8 billion, or $2,833 on average. That leaves about 50 million taxpayers yet to file, though the agency expected about 15 million additional returns to come in over the week ending last Friday — and about 14.6 million extension requests this tax season.

If you’re one of the procrastinators, stop reading this and go take care of your taxes. We’ll wait.

For the rest of us, today is a good day to consider how the government spends our money. Here’s a big picture overview from the Treasury Department of the federal government’s revenues and outlays for fiscal year 2018:

You can see that the Treasury took in about $3.3 trillion in receipts, including $1.7 trillion in individual income taxes, nearly $1.2 trillion in Social Security and other payroll taxes. It spent $988 billion on Social Security, $665 billion on defense, $589 billion on Medicare and $325 on interest payments. The deficit — the gap between what the government spent and what it took in — totaled $779 billion.

In a new piece for Economics 21, Brian Riedl of the conservative Manhattan Institute breaks down federal spending for 2019. The government will spend an average of $35,148 per household, he writes, while collecting $26,677 per household in taxes. The resulting deficit works out to nearly $8,500 per household.

“Federal spending has soared nearly $7,000 per household since 2007 and is projected to rise another $7,000 over the next decade (all numbers in this article are adjusted for inflation),” Riedl says. “Unless spending is reined in, tax increases must eventually result.”

Based on national averages, the more than $35,000 per household in federal spending for 2019 would include:

  • $13,178 on Social Security and Medicare

     
  • $6,483 on anti-poverty programs

     
  • $5,312 on defense

     
  • $3,054 on interest on the national debt

     
  • $1,556 on veterans’ benefits

     
  • $1,154 on federal employee retirement benefits

     
  • $876 on education

     
  • $557 on justice administration

     
  • $533 on health research and regulation

     
  • $493 on highways and mass transit

     
  • $422 on international affairs, including foreign aid, U.S. embassies and contributions to the United Nations and other organizations

     
  • $1,530 on all other federal programs, “including natural resources and the environment, disaster aid, unemployment benefits, economic development, farm subsidies, social services, space exploration, air transportation, and energy.”

Read Riedl’s piece for more details on each category of spending.

Most Americans Got a Tax Cut This Year – but Most Don’t Think They Did

The Tax Policy Center estimates that about 65 percent of households got a tax break on their 2018 returns — but taxpayers don’t see it that way. “If you’re an American taxpayer, you probably got a tax cut last year. And there’s a good chance you don’t believe it,” Ben Casselman and Jim Tankersley of The New York Times said Monday. A Times survey shows that just 40% of Americans think they got a tax cut last year, and only 20% are sure they did. (A Hill-HarrisX poll released Monday finds that just 18% of respondents say they are paying less in federal taxes this year, while 32% say they are paying more.)

Even high earners are skeptical. While nearly 90% of households earning more than $100,000 received a tax cut, less than half (46.4%) in the New York Times survey thought they did.

Casselman and Tankersley cite a sustained messaging effort by liberal groups to discredit the tax cuts as the source of the misperception. But others say the small size of the tax cut for many families — the middle fifth of earners received about $20 a week on average — and the fact that the cuts were tilted toward the wealthy contributed to the widespread belief that the 2017 tax cuts failed to deliver for the majority of taxpayers.

Number of the Day: A $600 Billion Tax Gap?

The most recent IRS estimate of the tax gap — the amount of taxes owed but not paid voluntarily or in a timely manner — put the net figure at $406 billion a year from 2008 to 2010. But William G. Gale and Aaron Krupkin of the Urban-Brookings Tax Policy Center suggest that the hole may have grown substantially in the years since. “If the tax gap stayed constant relative to GDP since then, it would have reached $560 billion by 2018,” they wrote in a recent post looking at the problem of tax evasion. “If it stayed constant relative to tax revenues, it would have reached about $600 billion.”

To put that number in perspective, take another look at the Treasury chart above. You’ll see that $600 billion, if the tax gap has grown that large, would be more than the government spent on Medicare last year, and almost as big as the defense budget. It’s about three-quarters of the 2018 budget deficit.

“Cutting IRS spending, as policymakers have done in recent years, is penny-wise and pound-foolish,” Gale and Krupkin write. “While it is unreasonable to expect to receive all taxes that are owed the government, the IRS could do far more if it had the resources. Adequately funding the IRS and making a variety of structural tax changes would help raise collection of taxes owed and mitigate public concern that the system may be rigged in favor of the wealthy.”

Roll Call’s Doug Sword said Monday that lawmakers may finally be changing their tune on IRS funding, and that “Congress and the White House appear ready to open the appropriations spigot once again after years of cutbacks.”

Fixes won’t come cheap, though. Just updating the agency’s ancient tech systems would cost more than $2.3 billion, according to IRS Commissioner Charles P. Rettig. But as Gale and Krupkin argue, additional funds would be money well spent as far as government finances are concerned.

Charts of the Day: Who Pays Taxes?

From a report by the liberal Institute on Taxation and Economic Policy, “Who Pays Taxes in America in 2019?”:

Meanwhile, Corporate Taxes Are Lower Than Ever

The GOP’s 2017 tax overhaul slashed the top corporate tax rate from 35% to 21% and, not surprisingly, business income tax revenues have dropped sharply.

A combination of lower tax rates and more generous tax breaks for things like equipment purchases produced a 31 percent drop in corporate tax revenues in fiscal year 2018 compared to the year before, according to data released in March by the Treasury Department. Corporate tax revenues in fiscal year 2017 were $297 billion, but just $205 billion in fiscal year 2018, even as the economy was growing at a faster pace.

“This is the first time corporate taxes have taken such a hit when the economy is not in recession,” CNN’s Lydia DePillis wrote Monday.

A big drop in effective rates: Howard Silverblatt of S&P Dow Jones Indices said in a note Sunday that the effective tax rate for S&P 500 companies fell to 13.22% in the fourth quarter of 2018 — a “significant drop” from the 24.29% rate recorded in fourth quarter of 2016 (see Silverblatt’s chart below).

Less than 1% of GDP: Corporate tax revenues averaged more than 4% as a share of gross domestic product in the 1950s, before sliding down closer to 2% in the following decades. In the fourth quarter of 2018, corporate tax revenues fell to just 0.77% of GDP, according to CNN’s DePillis. The Congressional Budget Office expects such revenues to rise gradually in the coming years, though nowhere near enough to pay for the 2017 tax cuts. A report released last week by the Institute on Taxation and Economic Policy showed that 60 Fortune 500 firms paid no federal income taxes last year, twice as many as the year before.

Too steep a cut? David Leonhardt of The New York Times argued Monday that while a reduction of the corporate tax rate is defensible on grounds that it moves the United States closer to international standards, the cut was too big and the overhaul included too many tax breaks. “A better bill would have paired a more gentle decline in the rate with a tougher approach to tax breaks, essentially trying to level the playing field among companies,” Leonhardt argued.

Leonhardt also noted that most U.S. companies never really paid the top rate: “Even before the law change, American companies weren’t actually paying very much in taxes.” The CNN chart above underlines his point.

Record business investment: S&P’s Silverblatt said that capital expenditures — the business investments that the tax cuts were designed in part to increase — did indeed set a record of $177 billion in the fourth quarter of 2018. But the record was only slightly higher than previous cyclical peaks — $173 billion in 2016 and $175 billion in 2014, for example — and businesses are projecting less investment in the coming quarters. White House economists say that increased business investment will produce higher growth for years to come, but independent experts have their doubts, with most estimates showing GDP growth falling to about 2.4% this year and in the 2% range in 2020 and beyond.

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Today isn’t just Tax Day. It’s also Patriots’ Day, Jackie Robinson Day, Titanic Remembrance Day and McDonald’s Day. Send your tips and feedback to yrosenberg@thefiscaltimes.com. And please tell your friends they can sign up to get their own copy of this newsletter.

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