A Tax Receipt: The Key to a Smarter Budget Debate

How could a "tax receipt" foster a smarter budget debate?

April 6, 2011

How could a "tax receipt" foster a smarter budget debate?

As the “Ides of April” looms, Americans are preparing their tax returns against the backdrop of a particularly vitriolic fight over the federal budget.

Indeed, Washington is so divided that the country faces the specter of a partial government shutdown if an agreement over the 2011 budget is not hashed out by Friday, April 8. In addition, the need to agree on a budget for the 2012 fiscal year, as well as the wrangling that will accompany the need to raise the debt ceiling in the coming months, will ensure that the high-intensity, high-stakes debate over Washington’s budget will dominate the political agenda for the foreseeable future.

While the outcomes of these various budget fights are as yet unknown, what is clear is that many Americans hold wildly inaccurate beliefs about how their tax dollars are spent — and politicians are self-servingly perpetuating and taking advantage of this confusion. To a substantial degree, this is to blame for the drawn out, overly divisive and misinformed budget debate.

For example, in a November 2010 poll conducted by the University of Maryland, the median estimate of the share of the federal budget that goes to foreign aid was 25% — off by a factor of 42 from the actual figure of 0.6%. Perhaps not coincidentally, when asked where the budget should be cut, this is the only area most Americans agree should get the axe.

To take another example, a CNN poll released on April 1 found that the median guess as to what share of the government’s budget goes to public broadcasting is 5%. As Talking Points Memo notes, this is 424 times higher than the actual figure.

Illustrating similar confusion about the way Washington spends Americans’ tax dollars, a March 2011 Pew Research Center poll found that 86% of Americans believe that reducing the budget deficit is either a “top priority” or an “important, but lower priority.” However, 65% of respondents oppose making changes to Medicare and Social Security as a way to reduce the deficit. This is despite the fact that these two programs together account for one-third of all federal spending and are the major drivers of the United States’ long-term debt problem (along with Medicaid).

Likewise, 67% of respondents oppose increasing taxes — suggesting that when it comes to reducing the deficit, Americans want to have their cake (receive generous government benefits) and eat it too (continue to pay low taxes). Ultimately, however, the country has no choice but to embrace spending cuts and tax increases in the coming years to get the United States’ fiscal house in order.

By and large, politicians are eager to exploit and perpetuate such misunderstandings about the budget, as this makes it easier for them to carry out their ideological agendas and avoid the hard choices that must eventually be made.

Witness how self-styled deficit hawks tend to focus on insignificant cuts to minor programs — Republicans’ ideologically driven quest to defund National Public Radio being a prime example — instead of proposing cuts to popular yet expensive entitlements like Social Security and Medicare, or to the massive defense budget.

To the extent that policymakers are willing to make significant deficit reductions, they pander to Americans’ aversion to tax increases by focusing solely on the spending side of the equation. This is illustrated by Representative Paul Ryan’s 2012 budget proposal, which calls for radical cuts to major government programs like Medicare and Medicaid instead of acknowledging the imperative to balance spending cuts with tax increases.

In fact, the Wisconsin Republican’s proposal actually lowers taxes on the wealthy and corporations — a questionable way to reduce the deficit.

In the end, such ideological rigidity — combined with an unwillingness to level with the American people about the need for spending cuts as well as tax increases — makes the political atmosphere inhospitable to sensible policymaking.

A simple solution

How best to ensure that Americans have a clear idea of just what it is they are getting when they pay their taxes each year — thereby better enabling them to hold their politicians accountable for reducing the deficit responsibly and contributing to a more intelligent budget debate?

The tax returns that Americans are busily preparing are the key to the solution. Third Way, a Washington-based think tank that focuses on moderate solutions to divisive issues, advocates that every American who files a tax return receives a “tax receipt.” This itemized list would be emailed or “snail mailed” by the government to each taxpayer and provide her with a precise accounting of how her tax dollars are spent.

For example, according to Third Way’s tax receipt calculator, the tax receipt for a middle-class family earning the U.S. median household income of $50,000 and paying $6,883 in income and payroll taxes in 2010 would look something like this:

2010 Tax Receipt for the Average U.S. Taxpayer (selected items):

  • Social Security (20.4%): $1,407.53
  • Defense (20.2%): $1,388.40
  • Medicare (13.1%): $899.43
  • Low-income assistance (9.3%): $639.08
  • Medicaid (7.9%): $543.22
  • Net interest payments (6.6%): $455.19
  • Unemployment compensation (4.7%): $322.91
  • Education (2.9%): $199.37
  • Law enforcement and homeland security (2.4%): $165.31
  • Transportation (2.3%): $155.06
  • Environmental protection and natural resources (1.0%): $68.18
  • Foreign aid (0.6%): $38.97
  • Diplomacy and embassies (0.4%): $29.74
  • Energy (0.4%): $26.93
  • Bailouts, currency & financial regulation (-3.7%): -$254.47

(Calculate your own tax receipt here.)

Armed with such a tax receipt, the average taxpayer would be more skeptical when his congresswoman advocates cutting foreign aid and other forms of discretionary spending, such as outlays on education, environmental protection and infrastructure, as serious solutions to the deficit problem.

He might also find it puzzling that there is only limited discussion of cutting the defense budget, despite the fact that over one-fifth of his tax dollars went to the Pentagon last year.

The taxpayer would also realize that outlays on Medicare and Social Security are so large that any serious debt-reduction proposal must simultaneously reign in spending on these crucial entitlements as well as increase taxes in order to avoid massive benefit cuts.

Toward a smarter debate

Would this simple reform be a panacea? Of course not. It will take much more to overcome the deep-seated structural issues that make U.S. political discourse so dysfunctional.

But ultimately, providing each taxpayer with a clear picture of how his or her tax dollars are spent has the potential to limit the degree to which future budget discussions fall prey to the bitter partisanship and sheer cynicism that are distorting the current budget debate, bringing America perilously close to a government shutdown and preventing our leaders from agreeing upon smart ways to reduce the deficit.

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