Your tax bill would need to double to close the deficit
"Assuming deductions, exemptions and credits were kept the same as they are now, Congress would have to raise each personal income tax rate by a factor of almost two and a half to erase the 2010 deficit," William Ahern, Tax Foundation director of policy and communications, wrote in his report titled, "Can Income Tax Hikes Close the Deficit."What would this type of hike actually mean for your pocketbook? Average tax payments would have to rise by almost $10,000 in 2010 to erase the deficit. For example the average tax filer making between $75,000 and $100,000 would pay $11,164 more in taxes.
What if we wait a few years until the current economic crisis is over? Ahern said that even if the country waited until 2012, when the president's budget projects a lower deficit, to balance the budget, tax rates would need to be 15.8% to 62.6%.
If the government really made the decision to raise rates this high, Ahern said in a press release, "At some point, government would be taking away all earnings and there would be no incentive to work. There can be little doubt that the high tax rates necessary to balance the budget in the next several years would discourage all income-producing endeavors."
But Congress hasn't acted because Ahern believes "voters are numb" to the subject of deficits, so politicians can "avoid the popular votes for cutting spending or raising taxes."
If the Congress doesn't raise taxes its only other option is to cut spending, but where do you cut? The New York Times developed an excellent interactive chart that breaks down President Obama's 2011 budget. You can see from that chart that $738 billion or 20% of the budget goes toward National Defense; 20% ($738 billion) toward Social Security (that's paid with FICA taxes taken out of your paycheck); 15% ($567 billion) for unemployment insurance programs; 14% ($498 billion) for Medicare; 10% ($381 billion) for other health programs and 7% ($251 billion) for interest on the national debt. That totals 86% of the budget.
So where would you cut? I'm sure you have your pet projects that you support just like Congress. In Congress, everyone has their pet projects and few will vote to allow for cuts in those projects. Instead it turns into a trading match, where one congressman agrees to vote for another's pet project so he can get funding for something else he wants.
Each of those budget category areas I mentioned above have major pockets of public supporters, which also makes it hard for Congress to make cuts in spending as they get bombarded with lobbyists for almost every tax dollar spent. The hard choices need to be made in a bipartisan way. Congress tried and failed to set up a bipartisan commission on the deficit, so instead President Obama set one up. Hopefully they will be able to sit down at a table and figure out how we can work toward a balanced budget for the Federal government without bankrupting the population.
Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies."