Congress failed to deal with the current and accumulated Federal budget deficits. There is no democratic consensus on how to cut spending. No consensus is likely to emerge until the full cost of the status quo is painfully apparent. Instead, embrace "traditional Republican fiscal responsibility" and "traditional Democratic social justice" themes: * impose a simple flat tax on large incomes, * include currently untaxed income in the flat tax base, * encourage provident and productive national investment, * integrate Social Security into the general fund with the other welfare mechanisms, * fund state and local government with a fixed percentage of Federal income tax revenues, * eliminate the accumulated Federal deficit with an automatic variable-rate surtax on the Flat Tax, * automate preparation of simple tax returns. The underlying intent is to maximize everybody's wealth by redistributing hope and thereby motivating everybody to be as productive as possible. Comments as to form or content are welcome; send them to tax90@validgh.com tbl | troff -ms source is available from the same address. What happened in October 1990? Congress failed to deal with the current and accumulated Federal budget deficits: Congress met the enemy, and after a symbolic scuffle, surrendered unconditionally, producing a new tax plan that * doesn't balance the current budget except by the most unrealistic forecasts, * doesn't significantly motivate appropriate investment in lieu of consumption, * doesn't restore significant progressiveness to the tax structure, * doesn't do a thing for international competitiveness, * makes the tax code even more complicated, * perpetuates the Social Security scam, * doesn't do a thing for the fiscal crisis in state and local government, * doesn't reduce the accumulated Federal deficit. This is truly a triumph of democratic politics. No matter how inept, a totalitarian government would not have been able to fail on so many fronts at once. However, it would be unfair to overlook the one element of success: * by obfuscation and complexity, the legislators concealed most of the additional regressive tax burden from themselves and from the voters. Then they wonder why junkies crave drugs. While this was happening, I filed an amended Federal tax return for 1989. I'd discovered a misplaced $3000 capital loss. My refund came to almost $1500. I had been taxed at a marginal rate of nearly 50%. Do you know how this can happen? Do your Congressmen and Senators who enacted the Tax Reform of 1986 know how this can happen? Is it safe to assume that they conscientiously prepare their own pro-forma tax returns every quarter for both regular and alternative minimum tax to make sure they pay enough estimated tax? Since they voted for that Tax Reform, surely they understand it well enough prepare their own tax returns without hiring accountants. It's unfortunate that the alternative minimum tax is so complicated - requiring keeping two separate sets of books - since the statistical odds of having to pay it are fairly low, but almost anybody with income besides wages and interest or any kind of tax loss might be liable, and the only way to be sure is to compute the tax. The good news is that it's too complicated for the IRS to detect whether you're liable except in extreme cases. What can be done? Below I outline a renovated Federal Individual Income Tax that aims to reverse the foregoing list of failures and successes; some of the details and minor points are set off in smaller type. Federal Flat Individual Income Tax Impose a simple Flat Tax on large incomes: Replace the current Alternative Minimum Tax (AMT) with a Basic Flat Tax plus a Deficit Surtax described later; taxpayers pay whichever is larger, the current nominally- progressive Regular Tax or the sum of the Basic Flat Tax plus Deficit Surtax. Flat Tax rates: Marginal Tax Rate Percentages Single Single Dependent Independent Family Taxable Income bracket % % % $0-5,000 0 0 0 $5,000-20,000 50 0 0 $20,000-40,000 50 50 0 $40,000+ 50 50 50 A family is a married couple with zero or more dependents or an independent individual with one or more dependents; family income includes that of all its dependents. Individual filers who receive more than half their support from another taxable person use Single Dependent rather than Single Independent tax rate. Flat Tax income base: The purpose of the old AMT and the new Flat Tax is to insure that the well-to-do pay some taxes. As it gets more complicated, in an attempt to cast a broader net, it becomes less effective. Instead of the current AMT complexity, taxable income for Flat Tax is computed by adding up all the positive lines of Form 1040 total income - lines 7-22 in 1989 - ignoring the negative lines and adjustments to income - then adding in currently untaxed income described below. Thus the Flat Tax encompasses wages, interest, and positive schedule C/D/E/F income, but net losses on C/D/E/F and elsewhere don't reduce the Flat Tax. The foregoing proposals encourage abolishing many complications of the current Regular Tax, such as earned income credit, kiddie tax, and restrictions on passive activity losses and investment interest. One way to measure any tax reform proposal is by how much it reduces the effective length of the Internal Revenue Code; but unlike earlier drafts of these proposals, in the interest of political palatability and at the cost of decreased NIA incentive, I propose to leave the Regular Tax alone, except for the effects of National Investment Accounts described below. Include currently untaxed income in the Flat Tax base: Untaxed income includes at least * untaxed interest on municipal, state, and Federal securities; paying income taxes will continue to be optional for anybody with enough capital to live off the income of tax-free municipals; * Social Security benefits; just as now, Social Security recipients with no other income will be in the zero tax bracket; * other governmental transfer payments that are primarily intended to support poor or distressed individuals and families, * gifts that were not taxable to the giver, because the giver was not a taxable entity or deducted the gift as a business expense. National Investment Accounts (NIA's) Encourage provident and productive national investment: Do you know the difference between IRA's, Keough's, SEP's, 403b's, 401k's, etc.? Why are there so many different programs to encourage people to save for their retirement? Who decided that retirement is the most important phase of life for everybody? Consider instead a system of National Investment Accounts (NIA's). Any institution authorized by Congress may offer NIA's. Any taxpayer can contribute any amount to an NIA at any time and withdraw any amount at any time. At year end each NIA sends a 1099-like form to the taxpayer and to IRS showing total deposits and total withdrawals. The taxpayer (and IRS) adds up his NIA 1099's. If there is a net withdrawal, it is taxable income for the Regular Tax and Flat Tax. If there is a net deposit, it is an adjustment to income for Regular Tax but not Flat Tax for that year. Thus net NIA deposits don't affect Flat Tax, so they are not an unlimited tax shelter for the well-to-do, but do provide a strong incentive for those with disposable income to save for the future. Typical tax planning for those with disposable income entails adjusting net NIA deposits or withdrawals so that Regular Tax equals Flat Tax. A 50% withholding tax can discourage frequent withdrawals. To avoid a repeat of the S&L follies of the 1980's, NIA institutions must limit their investment of NIA funds to certain provident and productive purposes enumerated by statute which might include * owner-occupied home loans, * loans to construct apartments in low-income neighborhoods, * student loans, * small business startups, * Federal, state, and local government securities, * on-shore developmental oil and gas drilling on private land within the United States. Congress might limit NIA authorization to savings and loans and credit unions and other financial institutions deemed needful or worthy of capital infusion. Think of the benefit to the nation if the legislative penchant for social engineering in the tax code were focused exclusively on arguing the foregoing lists of authorized types of financial institutions and provident and productive purposes. Social Security Integrate Social Security into the general fund with the other welfare mechanisms: Social Security and its related payroll taxes are a compulsory legal chain letter sent from one generation to its descendants. In this respect it is much more like other taxes than like an individual or family retirement saving mechanism. What you put in has very little to do with what you get out. So Social Security benefits might as well be funded like other welfare mechanisms, as part of the general fund: * Put the Social Security funds back in the general fund. * Abolish the Social Security tax on employers to improve US competitiveness in the world market. Employer taxes of this sort increase the cost of goods sold to the world market, and worse, increase the cost of a minimum-wage employee, thereby locking a class of potential marginal employees permanently out of the above-ground job market. * Abolish the regressive Social Security tax on employees. The 50% Flat Tax rate approximates the effect of the current system (24% AMT + 15% employer+employee Social Security tax + 11% for state and local government). * Include Social Security benefits fully in Flat taxable income. * No employment restrictions on Social Security recipients, in order to promote national productivity. Social Security simply becomes the reward - albeit small and taxable - issued to every US citizen reaching retirement age. State and Local Taxes Fund state and local government with a fixed percentage of Federal income tax revenues: Most states have a duplicate revenue structure paralleling the IRS for the purpose of collecting income taxes, plus additional structures for collecting sales taxes and property taxes. Even so most states suffer a current revenue crisis, despite years of declining investment in human and physical capital. Instead allocate 20% of all Federal Basic Flat Tax revenues for distribution to the states according to population. State governments share their allocated Federally-collected revenues with local governments. But to keep state and local spending under control, allow each Federal taxpayer a credit against his Flat Tax for any of the following paid to a state or local government: * income taxes * general sales taxes * real and personal property taxes * net losses in excess of income from government gambling schemes such as lotteries The amount of Federal revenues that would have been allocated to each state is reduced by the total credits against Flat Tax taken by Federal taxpayers for taxes paid to that state or its subdivisions. The intent is rapid abolition of the state and local taxes listed above. For that to happen, Congress has to remit allocations to the states promptly and without strings. What about states that need more revenue? They can fall back on their old favorites, such as sin taxes for general income, user taxes for specific projects, or even utility taxes. What about states that need less revenue? They can abolish other taxes, rebate the excess to their citizens, use it to retire public debt, or save it in a reserve fund for the next earthquake or hurricane, rather than relying on Federal disaster relief. Ratchet Down the Accumulated Deficit Eliminate the accumulated Federal deficit with an automatic variable-rate surtax on the Flat Tax: The foregoing proposals largely replace the current Federal Individual Income Tax and Social Security taxes with a Federal Basic Flat Individual Income Tax. In addition, a variable-rate Deficit Surtax is imposed to retire the accumulated Federal debt of previous years. That's because the other half of the budget problem is spending, and this aspect is much less susceptible than revenue to mechanical improvements. The first problem is eliminating the current year's deficit; the second problem is eliminating the accumulated deficit of previous generations. Ratcheting describes the approach I favor: every significant spending bill produces an automatic tax increase. Every significant spending cut produces an automatic tax decrease. A deficit reduction surtax automatically adjusts revenues. At the end of the year, you multiply your Federal Flat Tax by a positive or negative percentage to determine a surtax because the accumulated deficit is increasing or not decreasing fast enough, or a tax credit if the accumulated deficit is decreasing faster than planned. The surtax rate starts out at 0%. In subsequent quarters it could increase to 5%, 10%, 15%, ... or decrease to -5%, -10%, etc. Let us adopt this goal: stabilize the accumulated deficit in one presidential term (four years) and then eliminate the accumulated Federal budget deficit in one generation (thirty years). That means 16 quarters of no increase in the cumulative deficit followed by 120 quarters of uniform reduction in the cumulative deficit on a straight line. In any particular quarter, the current accumulated deficit will be either above or below the target for that quarter. If above, the deficit surtax ratchets up by 5% for the next quarter. If below, the deficit surtax ratchets down by 5% for the next quarter. Withholding is adjusted on a quarterly basis, and the final deficit surtax for the year is the average of the rates determined for each quarter. In the worst case, the surtax would be +5%, +10%, ... +40% in its first eight quarters, resulting in an annual surtax of 12.5% and 32.5% in the first and second years, for effective Flat Tax rates of 56% and 66% respectively. That would likely produce some action on reducing expenditures; the House of Representatives stands for re-election every two years! Four consecutive quarters of zero or negative surtax should terminate the four-year transition early. To counteract inflationary and deflationary effects, the ratcheting can also be applied to the "zero bracket" base amounts ($5000, $20000, $40000) in the Flat Tax table. For instance, when the surtax is +5%, also reduce the base amount +5% ($4750, $19000, $38000); when the surtax is -5%, increase the base amounts ($5250, $21000, $42000). Who decides whether we're above or below the target? Clearly an economist accountant with an intimate understanding of the Federal budget and with the integrity and independence of the Chief Justice of the Supreme Court. Would Congress have the will to do its duty on his recommendation? The one theoretical problem with feedback mechanisms is that maximum welfare expenditures and minimum tax revenues tend to be contemporaneous in the economic cycle, so what is intended as a negative feedback to stabilize the deficit might act as positive feedback to exacerbate economic swings. However economic cycles tend to have their own psychological momentum that government policy can modify only slightly, and the built-in two-quarter delay in the ratcheting mechanism may tend to dampen feedback effects. Transitions Abrupt changes in economic policy, no matter how well intentioned, are disruptive and tend to undermine hope for rational government. Consider a three year transition to the new tax structure, followed by a four year transition to stabilize the current debt, followed by a thirty year reduction of the accumulated deficit: 1991: Enact Flat Tax on taxable income base proposed above, but with 24% rate, the same as the current-law 1991 AMT; enact NIA's. 1992: Increase Flat Tax rate to 37%, abolish Social Security employer and employee taxes. 1993: Begin state funding with 20% of Flat Tax revenues, increase Flat Tax rate to 50% with credit for state and local taxes paid. 1994: Begin the Deficit Surtax, ratcheting to stabilize the accumulated Federal debt at 1 January 1994 level for four years. 1998: Begin ratcheting to linearly reduce the accumulated Federal debt to zero by 2028. The Code in code The foregoing proposals contain several simple concepts whose interaction might best be grasped from an algorithmic representation: Regular Taxable Income = Current Taxable Income + Net NIA withdrawal - Net NIA deposit - - - - - - - - Regular Tax = Current Tax Rates applied to Regular Taxable Income - - - - - Regular Untaxed Income = Municipal Bonds + Social Security Benefits + ... - - - - - Flat Taxable Income = Current Total Positive Income + Net NIA withdrawal + Regular Untaxed Income - - - - - - - - - Basic Flat Tax = Flat Tax % * (Flat Taxable Income - Flat Tax Zero Bracket) - - - - - - - - - Surtax = Deficit Reduction Surtax % * Basic Flat Tax - - - - - Flat Tax = Basic Flat Tax + Surtax - State and local taxes paid - - - - - - - Individual Income Tax = max(Regular Tax, Flat Tax) - - - - Basic Flat Tax computation can be automated if Regular Tax Form 1040 is modified slightly; for instance, include municipal bond interest income on schedule B, but exclude it as an adjustment to income. That way it will be automatically subject to Flat Tax but not Regular Tax. Form 1040IRS - Let the Feds do it Automate preparation of simple tax returns: The impact of this (or any other) tax reform can be minimized with automatic 1040IRS. Automatic tax report forms are machine-readable versions of W-2, 1099, and related reports that are currently required to be filed by employers and payers with the IRS, and with employees and payees, by February 1. With appropriate data- processing support, on March 1 IRS can mail a 1040IRS tax return to each taxpayer, based upon the filing status, dependents, and address from the previous-year return, any estimated tax payments received, and all the items for which IRS has received automatic tax reports by February 15. 1040IRS takes into account the Regular and Flat taxes, adding in the deficit surtax and subtracting an average state and local tax deduction appropriate to the taxpayer's state of residence and income level. Mass December mailings of 1040EZ/1040A instructions would no longer be necessary - 1040IRS would come with sufficient instructions to determine eligibility. If the taxpayer finds that the automatic return is complete and correct for his situation - which would be true for most current 1040EZ and 1040A filers, as well as many current 1040 filers - he so certifies by signing and returning it by April 15 along with any balance due. If there is a refund due, it is sent by IRS two weeks after receipt of the signed return. Taxpayers with more complex situations, or who want to get credit for larger than average state and local tax payments, would file form 1040 by April 15 as usual, but they would find the data from 1040IRS helpful in getting started. What about corporations and international competitiveness? In order to improve competitiveness of American goods in the world market of the 1990's and beyond, it would be prudent to abolish Federal, state, and local corporate income taxes and payroll taxes, as well as burdensome reporting requirements and minimum wage and benefits laws that keep the bottom of society permanently and hopelessly unemployable. People pay taxes, not corporations. Corporations provide an organized way to create jobs! But I'd settle for eliminating the employer contribution to Social Security and allowing corporations to deduct, from their taxable income, those dividends paid to shareholders for which the corporation can report a taxpayer identification number to the IRS. Furthermore, if corporate income tax is to be retained, some of the ideas above for individual income tax can usefully be applied, particularly funding states with a percentage of the Federal corporate income tax revenues in exchange for eliminating state corporate income and property taxes, and adding a deficit reduction surtax to corporate income tax. Like Social Security, unemployment insurance taxes could be abolished and (Flat taxable) benefits paid from general funds. Other general-fund taxes that could be abolished with little revenue harm include excise, customs, and estate and gift taxes. Their principal justification is social engineering. What's the point of another tax reform proposal? Since the foregoing proposals don't change spending, they don't increase or decrease overall taxes, they just rearrange the burden to be currently significantly lighter on the poor, and currently significantly heavier on those with disposable income. This heaviness arises from revoking the legislative license to fund current consumption by taxing future generations in the form of inflation and debt. The ratcheting mechanism is an essential antidote to the legislative tendency to spend 120% of revenues no matter how high the revenues get. There is no democratic consensus on how to cut spending: At present, all major direct and indirect Federal expenditures are critical national economic and military security priorities - just ask representatives of the affected constituencies. The only "fat" in the budget is the other guy's critical priority. By making the entire tax burden obvious, current, and painful, it may be possible to develop the currently-elusive democratic consensus on what spending needs to be cut. Politicians in a democracy have a powerful incentive to bleed the body politic with a thousand wounds that are individually small and seemingly inexpensive, especially since their re-election campaigns are now predominantly financed by special interests. Some of these unaffordable special-interest expenditures are line items in the budget, while others are indirect via the tax code; almost everybody resists diminishing their favorite tax expenditures: * municipal bonds on schedule B, * long-term capital gains on schedule D, * medical expenses on schedule A, * mortgage interest on schedule A, * charitable donations on schedule A, * exemptions for large families, * various tax credits, because their losses will be immediate and quantifiable and the gains resulting from a simple, progressive, unshelterable tax structure - that made real progress against the deficit and rewarded investment - are deferred and currently intangible. Computer system designers understand this phenomenon by analogy to CISC design: the complicated unforeseen interactions of a host of minor "optimizations" for specific problems result in overall system performance that is uneconomical and unpredictable for everybody's problems. Similarly, persons familiar with the evolution of complex software systems recognize the Federal income tax code to be the product of continuous tampering by many hands, all attempting to fine-tune some specific feature for some special interest, and most with no view of the architecture of the whole or the compound effect of many inconsistent extensions. It's easy to be cynical and morally irresponsible - tax cigarettes and liquor to raise general funds, or set up a government gambling monopoly - why not establish Federal opium dens and houses of prostitution as well? Instead, it's our duty to support rational, morally responsible programs and candidates when we get an opportunity to do so. Most, if not all, of the foregoing proposals are not new, although the combination may be somewhat novel. The current complication is a great benefit to those who are already doing well; the wholesale adoption of the foregoing proposals will increase my tax bill. But I'd have a better feeling about computing and paying it. The ensuing structural changes in the economy will redound to our benefit and even more so to our children's. Philosophy The underlying intent is to maximize everybody's wealth by redistributing hope and thereby motivating everybody to be as productive as possible: My sympathies are basically Libertarian, but I try to be practical rather than doctrinaire about it. The American people are not ready for full personal responsibility overnight, judging by the experience of the 1980's, which was hardly Libertarian overall but had some elements of deregulation - as in S&L's. I am also sympathetic to egalitarianism in the sense of providing equal opportunity, but very conscious of the essential antagonism between equality and liberty: if everybody is completely free of external constraints, then some can and will deny freedom to others. Planned economies leave everybody equally poor with no freedom to improve their lot and thus no hope of improvement. Completely unplanned laissez-faire economies, by freeing some individuals to do their best, unfortunately also tend to create permanent classes of accumulated wealth and accumulated poverty, so that in the end the children of the people who didn't make it have no freedom to improve their lot and thus no hope of improvement. The economic process must leave people free to improve their relative lot by creating wealth but there have to be countervailing forces toward equalization of opportunity so everybody feels equally motivated to do their best. Then everybody's wealth will be maximized. But economic justice must be perceived for hope to prevail, that everybody may be motivated. No consensus is likely to emerge until the full cost of the status quo is painfully apparent: The best way to get the public interested in reducing government expenditure is to make the cost immediately apparent. That's the primary intent of these proposals for putting it all into a graduated individual income tax rather than dividing it up among individual income tax, corporate income tax, sales tax, property tax, Social Security, sin taxes, inflation, chain letters to future generations to pay for current consumption, selling assets to foreigners, government-sponsored vice, etc. General costs of government should be paid for by those who enjoy the most social benefit in the form of disposable income, which implies an income tax. The intent of these proposals is to effectively tax disposable income at 40% for the Feds, plus 10% for the state and local governments, plus an additional amount to reduce the accumulated deficit. Beyond mechanical ratcheting mechanisms, major attitude adjustment is required to achieve a balanced budget. America can't afford to be everybody's policeman everywhere in the world; nor can it afford an indefinitely expanding budget for our own retired elderly when there are hungry children at home and around the world. Embrace "traditional Democratic social justice": Unfortunately the primary issue of the next generation is probably going to be conflict between the have and the hopeless have-not countries of the world. Saddam Hussein is trying to position Kuwait as the first shot in that war, and he has had some success, since the idea is not completely fabrication. Thanks to ever-cheaper high tech nuclear/chemical/biological weapons, it is not going to be very hard for the hopeless have-nots to pull the haves down to their level. It is certainly preferable, although much harder, to pull the have-nots up into the haves - the internal politics and policies of the have-nots are as great a stumbling block as anything else. However I don't see any hope without some element of wealth redistribution. The Saudis and Kuwaitis started off in that direction about 15 years ago, redistributing our wealth to themselves, but their style of Reaganesque consumption hasn't set well with a lot of their Arab "brothers", much less the rest of the world. For some reason Bush thinks that it's a good investment to send half a million men to Saudi Arabia to restore the status quo in Kuwait and so that Europe and Japan will be able to enjoy depressed oil prices again - a stance that must puzzle other Texas oil men. Bush might weigh matters differently if he knew that the cost of intervention was ratcheting away his re-election prospects. A form of wealth redistribution that seems to work better is capital investment. Two private programs that I know about that enjoy modest success are Habitat for Humanity and Heifer Project International. Can these be successfully and timely scaled up to a higher level by appropriate governmental action? I don't know, but I don't think the world as a whole will be ready for Libertarian ideals as long as hopeless desperation is so widespread. What can the US do about that? Embrace "traditional Republican fiscal responsibility": The first thing to do is get America's own financial house in order since that will benefit the economy of every country in the world. By living within current income after making payments toward the accumulated debt of previous generations and making provident investments for the future, we set a good example and obtain the moral authority to demand the same of other governments. Excerpts from Tax Advisory, Coopers & Lybrand Executive Briefing, December ------- ------- --------- -------- 1990 If your 1991 income is the same as in 1990, here is how your 1991 taxes will change [in addition to the well-publicized excise tax increases, the AMT rate boost from 21% to 24%, and the Medicare tax of 1.45% on earnings up to $125,000]: 1990: Your taxable income is below the bubble, that is, less than $78,400 (couple) or $47,050 (single). 1991: Your taxes will probably be slightly lower because of the indexing of the exemptions and tax brackets. 1990: Your marginal tax rate is 33% because you are in the bubble, with taxable income from $78,400 to $185,730 for a childless couple, to $208,690 for a family of four, or from $47,050 to $109,100 for a single person with no dependents. 1991: Your marginal tax on ordinary income will probably range from slightly lower to several percentage points higher than 33%, primarily depending on your family size. The rate for a family of four will be approximately 34%; for a single person with no dependents, approximately 32.5%. On long-term gains, the marginal rate will generally be from one to four points less than 33%. 1990: You are above the bubble, with taxable income of over $185,730 (childless couple) or over $109,100 (single) and your marginal tax rate is 28%. 1991: Your marginal tax rate on ordinary income will increase from 28% to approximately 32% or possibly higher, and on long-term gains from 28% to approximately 29% in most cases. Interesting data from the 1991 World Almanac Some of this may not be consistent; that's the way it was printed. Most numbers are dollar amounts in billions; exceptions are % percentages, CPI, and per-capita amounts in dollars. US CPI, Trade, GNP, Personal Income, Budget, Deficit Calendar or Fiscal Year 1940 1950 1960 1970 1980 1985 1988 1989 Consumer Price Index 39 82 108 118 124 International Trade Current Account Balance 3 2 1 -122 -129 -110 Gross National Product 515 1016 2732 4874 5201 Personal Income 402 811 2165 3325 4071 4384 % taxed 13 14 16 15 15 15 % saved 6 8 6 4 4 5 Federal receipts 7 39 92 193 517 734 908 991 Federal outlays 9 43 92 196 591 946 1063 1143 Current deficit 3 3 0 3 74 212 155 152 Cumulative deficit 43 256 284 370 908 1823 2602 2857 Cumulative deficit per capita 325 1688 1572 1814 3985 7598 10534 11545 % of current outlays for deficit interest 11 13 10 10 13 19 20 25 Cumulative deficit as % of GNP 36 33 53 55 Data from Bureau of Public Debt, Bureau of Economic Analysis, and Bureau of Labor Statistics. Personal income % saved ranged from 8.6% in 1975 to 3.2% in 1987. FY89 ended 30 Sep 89. Cost of the Gulf crisis will mostly appear in FY91. Cost of the S&L bailout began to be noticeable in FY88; in June 1990, GAO estimated the present value cost of the bailout at $192 billion. FY 1989 Federal Receipts Individual Income 446 Social Security etc. 333 Corporate Income 103 Excise 34 Unemployment, retirement, etc. 27 Interest 20 Customs 16 Estate and Gift 8 Miscellaneous 3 TOTAL 991 Data from US Treasury Financial Management Service. Note that individual income and payroll taxes account for 79% of Federal receipts. FY 1989 Federal Outlays DOD oper&maint 87 DOD procurement 82 DOD military personnel 81 DOD R&D&T&E 37 DOD civilian 23 Interest on public debt 241 Social Security 227 Health Care Financing Adm (Medicare etc.) 163 Agriculture except Food Stamps 34 Independent Agencies 32 Office of Personnel Management 29 Transportation 27 Education 22 HUD 20 Unemployment Trust Fund 19 Veterans 19 Food Stamps 14 Public Health Service 12 Energy 11 IRS 11 NASA 11 Undistributed Offsetting Receipts -89 TOTAL 1143 Data from US Treasury Financial Management Service. Small items omitted. 1988 state and local tax burden for family of four Effective tax burden as a percentage of gross family income Gross family income $25000 $50000 $100000 City % % % Memphis 7.6 6.3 5.7 Median of 51 cities 8.1 8.0 8.9 New York 9.9 12.8 13.8 Washington DC 10.1 10.9 11.7 Milwaukee 13.7 14.6 14.6 Data from District of Columbia Department of Finance and Revenue. FY 1989 state government finance Total revenue 587 Total expenditures 525 Total debt 296 Dept per capita 1194 Taxes per capita 1147 Federal aid per capita 437 Data from Census Bureau. Doesn't include local government. For further information The best preparation for understanding Federal income tax complexity issues is to invest in a variety of business activities and prepare your own tax returns over a period of years encompassing several "reforms" and "technical corrections". As a bonus, you will necessarily learn a lot about computers. Critical acclaim from your public officials, for the proposals presented herein Commissioner Goldberg has asked me to respond to your letter... Your proposal raises several broad policy issues and would require extensive modifications to our existing body of tax law. In some respects, such as eliminating schedule A deductions, the tax law would be simplified and easier to administer. In other respects, the opposite result may occur. Let me assure you that the IRS is committed to the concept of tax simplification and making compliance less burdensome for taxpayers. Thank you for taking the time to share your proposal with us. - Richard J. Hinkemeyer, Acting Director, Legislative Affairs Division, IRS, 18 December 1990. Thank you for contacting me about the budget agreement. I greatly appreciate hearing your concerns, and I could not agree with you more about the need for a balanced and fair settlement. As you know, the House of Representatives has voted down the proposed settlement. I did vote no, and let me tell you my reasons... I was left with a package based on faulty economic assumptions, no guarantee of growth incentives, and likely growth in total spending. Over the next few days, we must do better than that, and I believe we will. - Tom Campbell, House of Representatives, 12 December 1990. That you for your recent letter... We appreciate your taking the time to share your views on this important issue with us. - Jennifer J. Johnson, Associate Secretary, Board of Governors of the Federal Reserve System, 10 December 1990.