Sunday, March 16, 2014

Federal government (and tax bills) keep on growing

Federal government (and tax bills) keep on growing
jeannetteSHOWALTER, CFA 
A common complaint is that the size and scope of federal government agencies and departments are far too large — both bloated, on paths of unrestrained growth, and too large to be properly managed. Is this true?

According to the Cato Institute, the size of the U.S. federal budget has grown from $1.9 trillion in 2001 to $3.7 trillion in 2013. The biggest increase during that time was from 2008 to 2009; the spending increase was largely in response to the economic contraction associated with the great recession. Unfortunately, the increase in spending to spur the economy has turned out to be ongoing spending and not a one time splurge to jump start the economy.

As for government sectors receiving funds, the largest amount of federal money spent is: to Social Security (22 percent); Defense (18 percent); Medicare (14 percent); Medicaid (7 percent); and interest (6 percent.) The balance of “all other” spending is 33 percent but none of the “all other” sub-components individually exceed 6 percent.

What scares many taxpaying citizens is the runaway growth in entitlement spending. As the second chart shows, there has been rapid growth in entitlement spending compared to down trendingt di in defense and nondefense discretionary spending. (And there is more defense downsizingd on the horizon.)

There is value to a growing GDPG far beyond the employment m opportunities it brings to our citizenry. A GDP growing faster than the growth in the U.S. budget allows a growing tax base to pay for larger government. Per projections by the Cato Institute, the 2000 budget was 18 percent of GDP; the 2010 budget was 24 percent. But brace yourselves for 2030 and 2040. They come in at 32 percent and 37 percent, respectively. What kind of tax rate will that imply for our next generation?

Here is a closer financial snapshot of several (but not all) federal agencies according to

• The Department of Agriculture will spend $156 billion in 2013, or $1,300 per household; operates about 240 subsidy programs; and employs

93,000 workers in about 7,000 offices across the country.

• The Department of Defense will spend about $633 billion in fiscal 2013, or $5,200 per household; employs 1.5 million uniformed employees and about 780,000 civilian employees.

• The Department of Education will spend about $48 billion in 2013, or $400 per household; employs 4,300 workers; and operates 153 different subsidy programs.

• The Department of Health and Human Services will spend $908 billion in 2013 (Medicare totals $504 billion and Medicaid totals $266 billion), or $7,500 per household; employs 70,000 workers.

• The Department of Social Security Administration will spend $873 billion in 2013, or $7,300 per household in the nation.

Some of the federal budget expenses have increased due to a growing number of federal staff and hefty compensation and benefits packages. According to Cato, the average U.S. federal government employee makes $14,632 more in direct cash income than his or her private sector counterparts (i.e., at $74,436 in federal government versus $59,804 in the private sector. The extremely generous benefits given to federal employees boosts their real income by $26,632, putting total average federal employee compensation at $114,436 versus the private sector’s average at $87,804.)

Unless the federal government’s size is limited financially, the next generations will face huge tax burdens and loss of their benefits under a variety of social programs. Another argument against the federal government’s growth is that it crowds out capitalism and squelches private enterprise’s function and spirit. By the way, who is capable of managing annual expenditures of some $15 trillion annually?

For those not paying taxes, the scope and size of federal government is not worrisome. For those paying escalating tax bills, it is a constant concern. ¦

— Jeannette Showalter, CFA is a commodities broker with Worldwide Futures Systems. Find her on Facebook at Jeannette Showalter, CFA.

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