Budget Analysis, Coursework Example

Of all the issues in US politics, perhaps none draws the vitriol and ire of both parties as much as the annual war known as the budget making process.  Indeed, both Republicans and Democrats fight in Congress over how the government’s revenues will be allocated among seeming endless interest groups and stakeholders. This exercise, while just a theoretical one, attempts to “balance the budget” for the proposed deficit for fiscal year 2011 through a number of different policy mechanisms.  Overall, I propose two different (macro) policies to balance the budget for the fiscal year given: 1) Raise taxes; 2) Cut programs.  For raising taxes, the top marginal rate for individuals will be raised from 35% to 37.5%; tax deductions (also known as “loopholes”) will be closed for those making more than $250,000.  Also on the revenue side, the corporate tax rate will be reduced to 20% in order to help incentivize corporations to hire more individuals and repatriate capital back to the US.  Finally, there will be substantial cuts in two programs: 1) Medicare; 2) Medicaid.  For Medicare, the age for the incidence of benefits will be raised to 70.  For Medicaid, the budget will be cut by offering block grants to the states.

According to the President’s 2013 budget, the US will be running a debt of roughly nine hundred million dollars in 2013; this is a combination of numerous factors including slow economic growth, lower tax rates, and increased spending (due to automatic stabilizers built in the budget). In order to deal with this shortfall in the budget, I propose the following policies to balance the budget in the year 2013.

First, government revenues will need to be raised.  Although there is typically substantial opposition to revenue increase requests (e.g., taxes), it is unlikely that nearly one trillion dollars can be cut from the debt without paying it through additional revenues.  With that in mind, the next question usually asked is: Who will pay for the increase?  Overall, I propose an increase in taxes that will pay down roughly half of the 2013 debt ($450 million). This hefty amount will come from two different areas: 1) an increase in the marginal tax rate on the top tax bracket; 2) the closing of “loopholes” (deductions) for those that earn more than $250,000 annually.  The first policy recommendation, an increase in the marginal tax rate will pay for roughly ¼ of the debt amount (this is taken as a rough approximation; it is quite difficult to know how much actually an increase in the marginal tax rate will have; thus an estimate is made here).

Currently, the top tax rate on individuals is 35%; under my plan, that tax rate will be raised to 37.5% effective over a two-year period: that is, the tax rate will be raised 1.25% in fiscal year 2013 and another 1.25% in fiscal year 2014.  This will be responsible for raising roughly $400 million dollars.  At the same time, numerous tax deductions will be closed for those individuals that make more than $250,000;  those deductions include the housing mortgage deduction rate and the capital gains tax rate which be raised for those making more than $250,000.

In addition to this increase in individual tax rates, I propose a reduction in the US tax rate from  % to 20%.  There are a number of reasons behind this substantial rate cut: 1) the main economic problem currently facing the US economy is jobs; a lower corporate income tax rate will incentivize corporations to hire more as a function of having more profits (at least in theory the incentive to hire will be greater than at the current tax rate); 2)  corporations are holding substantial capital overseas because they do not want to repatriate and pay higher taxes on it;  the reduction in the corporate tax rate is made to help incentivize that return of capital to the US where corporations would likely spend it on investment and R&D that would drive corporate and economic growth.

Besides these policies on the revenue side, I also have two main budget reductions that will make up for another $450 million in the 2013 budget.  The first policy is to raise the age of receiving Medicare from 65 to 70.   Although this policy would never pass a branch of congress, and would likely be perceived as political suicide for a wide swath of the population, the move would likely lead to a large reduction in Medicare spending.  For purposes of this exercise, the reduction has been estimated at roughly $300 million, but it would likely be much larger than that, even factoring in the fact that some individuals would put off health care until 70 that might result in a higher level of expenditures.

Second, and perhaps equally as controversial, I would propose a cut in the federal portion of the Medicaid budget.  This would be accomplished through giving grants directly to states for their annual costs rather than having the federal government on the hook for the amount of care that states offer above and beyond a certain threshold.  This policy recommendation would be somewhat less controversial than  that of Medicare for two reasons: 1) Medicaid is not an entitlement but a program aimed at giving basic health care to individuals of a lower income; 2) The constituency affected by these cuts, lower income individuals, are not as fervent and do not vote in such large proportions as the elderly.  Although this policy would likely generate substantial savings, for the purpose of this exercise, the estimate will be between $200-$300 mn dollars.

Overall, I have balanced the 2013 fiscal year budget via a combination of increasing revenues through increased taxes and reducing spending on major health care programs.  Although these changes would be quite difficult to enact, it does show that our current budgetary problems (and impasse) can be overcome with the political will to do so.