2012

$4.0 trillion $4.0 trillion $3.5 trillion $3.5 trillion $3.0 trillion $3.0 trillion $2.5 trillion $2.5 trillion $2.0 trillion $2.0 trillion $1.5 trillion $1.5 trillion $1.0 trillion $1.0 trillion $0.5 trillion $0.5 trillion

Federal Budget in Pictures

$4.0 trillion $4.0 trillion $3.5 trillion $3.5 trillion $3.0 trillion $3.0 trillion $2.5 trillion $2.5 trillion $2.0 trillion $2.0 trillion

Budget Chart Book $1.5 trillion $1.5 trillion

$1.0 trillion $1.0 trillion $0.5 trillion $0.5 trillion

Federal Spending

Federal Revenue

Debt and Deficits

Entitlements

2012

$4.0 trillion $4.0 trillion $3.5 trillion $3.5 trillion $3.0 trillion $3.0 trillion $2.5 trillion $2.5 trillion $2.0 trillion $2.0 trillion $1.5 trillion $1.5 trillion $1.0 trillion $1.0 trillion $0.5 trillion $0.5 trillion

Federal Budget in Pictures

$4.0 trillion $4.0 trillion $3.5 trillion $3.5 trillion $3.0 trillion $3.0 trillion $2.5 trillion $2.5 trillion $2.0 trillion $2.0 trillion

Budget Chart Book $1.5 trillion $1.5 trillion

$1.0 trillion $1.0 trillion $0.5 trillion $0.5 trillion

Federal Spending

Federal Revenue

Debt and Deficits

Entitlements

The Thomas A. Roe Institute for Economic Policy Studies

Copyright 2012 The Heritage Foundation

214 Massachusetts Avenue, NE Washington, DC 20002 (202) 546-4400 heritage.org

About the Federal Budget in Pictures

spending and stabilize the debt, U.S. Debt Is on Track to Fuel an Economic Crisis (p. 38). Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits (p. 7). Medicare Is Adding to Federal Deficits Faster Than Other Government Spending Programs (p. 44), and Social Security Deficits Are Permanent and Growing (p. 45). Meanwhile, Medicare and Other Entitlements Are Crowding Out Spending on Defense (p. 8), a core constitutional function of government. Some suggest raising taxes to cover budget deficits. However, Balancing the Budget Without Cutting Spending Would Cause Taxes to Skyrocket (p. 50) to the point where Hiking Taxes to Balance the Budget Would Require Doubling Tax Rates (p. 51). Taxing the Wealthy to Balance the Budget Will Not Work (p. 52), as this would necessitate raising tax rates to mathematically impossible levels.
iii

ederal spending and debt are out of control, and if America does not change course, the future will be dramatically worse. Now more than ever, it is crucial that Americans understand what our nations spending, taxes, and debt mean for them and their families. The Heritage Foundations Federal Budget in Pictures offers a unique tool to learn about the federal budget in a clear and compelling way. These pictures reveal the urgent need to rein in spending. The federal budget is on an unsustainable course, because Publicly Held Debt Is Set to Skyrocket (p. 30) despite Taxes Soaring Past Highest Level Ever (p. 24). Federal Spending per Household Is Skyrocketing (p. 2), and Federal Spending Exceeds Federal Revenue by More than $1 Trillion (p. 3). If Congress fails to adopt the transformational reforms necessary to cut

President Obamas Budget Hikes Taxes by $2 Trillion (p. 23) even though Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts (p. 25). Higher taxes on working, saving, and investing would, however, discourage the productive activities that enable the American economy to flourish and the American people to prosper. American businesses are already hamstrung internationally, as the U.S. Has the Highest Corporate Tax Rate (p. 21). Bold, transformational reforms are needed to solve Americas spending and debt crises.

The Heritage plan, Saving the American Dream, achieves this through spending, entitlement, and tax reforms. It reduces the size of government, encourages personal fiscal responsibility, and fosters economic growth. It balances the federal budget in ten yearswithout raising taxes. The Federal Budget in Pictures will help all Americans understand the severity of the nations current fiscal situation and appreciate the growing magnitude of decisions that lawmakers must confront to fix the debt, cut spending, and restore prosperity in America.

iv

Table of Contents
FEDERAL SPENDING Federal Spending per Household Is Skyrocketing................................................................................................................................................................................................................................................. 2 Federal Spending Exceeds Federal Revenue by More than $1 Trillion............................................................................................................................................................... 3 Federal Spending Grew Nearly 12 Times Faster than Median Income............................................................................................................................................................... 4 What if Families Handled Finances Like the Federal Government Does?................................................................................................................................................. 5 Mandatory Spending Has Increased Nearly Six Times Faster than Discretionary Spending..................................................................... 6 Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits...............................................................................................7 Medicare and Other Entitlements Are Crowding Out Spending on Defense...................................................................................................................................... 8 National Defense Spending Would Plummet Under Obamas Budget................................................................................................................................................................. 9 Budget Control Act Sequestration Would Hit Defense Hardest.....................................................................................................................................................................................10 Obama Budget Would Make Defense the Lowest Budget Priority...............................................................................................................................................................................11 More than Half of All Federal Spending Will Be on Entitlement Programs in 2012....................................................................................................... 12 Total Welfare Spending Is Rising Despite Attempts at Reform......................................................................................................................................................................................... 13 More than 70 Percent of Federal Spending Goes to Dependence Programs..................................................................................................................................... 14 Cut Spending, Fix the Debt, and Restore Prosperity................................................................................................................................................................................................................................... 15 FEDERAL REVENUE Taxes per Household Have Risen Dramatically....................................................................................................................................................................................................................................................... 18
v

Top 10 Percent of Earners Paid 71 Percent of Federal Income Taxes ................................................................................................................................................................. 19 Federal Revenues by Source.................................................................................................................................................................................................................................................................................................................................. 20 U.S. Has the Highest Corporate Tax Rate................................................................................................................................................................................................................................................................................. 21 Obamacares Barrage of Tax Hikes..........................................................................................................................................................................................................................................................................................................22 Obamas Budget Hikes Taxes by $2 Trillion......................................................................................................................................................................................................................................................................23 Taxes Soaring Past Highest Level Ever.........................................................................................................................................................................................................................................................................................24 Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts........................................................................................................... 25 Tax Revenues Return to Historical Average....................................................................................................................................................................................................................................................................26 Heritages New Flat Tax Simplifies the Tax System....................................................................................................................................................................................................................................... 27

DEBT AND DEFICITS Publicly Held Debt Set to Skyrocket....................................................................................................................................................................................................................................................................................................30 Each Americans Share of Publicly Held Debt Is Skyrocketing........................................................................................................................................................................................... 31 Obamas Budget Fails to Solve the Debt Crisis Despite $2 Trillion in Tax Hikes....................................................................................................................32 Obamas Budget Continues Unprecedented Deficits................................................................................................................................................................................................................................. 33 Federal Budget Deficits Will Reach Levels Never Seen in the U.S..............................................................................................................................................................................34 Rising Deficits Drive U.S. Debt Limit Higher, Faster................................................................................................................................................................................................................................... 35 Interest On the Debt Will Nearly Double Over the Next Decade..................................................................................................................................................................................36
vi

 Interest on the Debt Exceeds Spending for Many Programs.................................................................................................................................................................................................. 37 U.S. Debt on Track to Fuel Economic Crisis..................................................................................................................................................................................................................................................................... 38 Debt to Grow Unless Government Spending Is Reduced................................................................................................................................................................................................................39
ENTITLEMENTS Entitlement Spending Will Nearly Double by 2050.....................................................................................................................................................................................................................................42 Tax Revenues Devoured By Medicare, Medicaid, and Social Security in 2045...........................................................................................................................43 Medicare Adding to Federal Deficits Faster than Other Government Spending Programs.........................................................................44 Social Security Deficits are Permanent and Growing................................................................................................................................................................................................................................45 Without Entitlement Reform, Federal Spending Will Exceed 40 Percent of the Economy by 2050....................................46 Discretionary Spending Cuts Alone Will Not Balance the Budget............................................................................................................................................................................ 47 Even Eliminating Defense Spending Completely Would Not Balance the Budget...........................................................................................................48 Letting Tax Cuts Expire Will Not Balance the Budget............................................................................................................................................................................................................................49 Balancing the Budget Without Cutting Spending Would Cause Taxes to Skyrocket....................................................................................................50 Hiking Taxes to Balance the Budget Would Require Doubling Tax Rates................................................................................................................................................ 51 Taxing the Wealthy to Balance the Budget Will Not Work........................................................................................................................................................................................................... 52 Government Policy Reform Needed to Keep Spending Low and End Deficits Without Raising Taxes.......................... 53

vii

Federal Spending
Spending is at record levels and is still growing, threatening economic freedom.

Federal Spending per Household Is Skyrocketing

the federal government is spending more per household than ever before. Since 1965, spending per household has grown by 152 percent, from $11,900 in 1965 to $30,015 in 2012. From 2012 to 2022, it is projected to rise to $34,602a 15 percent increase.

INFLatIoN-adJuSted doLLarS (2012) 2022: $34,602

$35,000

2009Stimulus package and bailouts: $31,542

$30,000

2012: $30,015

$25,000

$20,000

$11,900
$15,000

$10,000

$5,000

$0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Actual Projected
2010 2015 2020

Sources: U.S. Census Bureau, Oce of Management and Budget, and Congressional Budget Oce.

Federal Spending Chart 1 Federal Budget in Pictures 2012

heritage.org

Federal Spending Exceeds Federal Revenue by More than $1 Trillion

Since 1965, spending has risen constantly. While federal revenues are recovering from the recent recession, spending is growing sharply, resulting in four consecutive years of decits exceeding $1 trillion.

INFLatIoN-adJuSted doLLarS (2012)

$4 trillion

$3.60 trillion est. 2012:

$3 trillion n

trillion decit
Spending
$2.52 trillion

$1.08

$2 trillion n

revenue
$1 trillion n

$0 1965 Source: Oce of Management and Budget. 1970 1975 1980 1985 1990 1995 2000 2005 2010

Federal Spending Chart 2 Federal Budget in Pictures 2012

heritage.org

Federal Spending Grew Nearly 12 Times Faster than Median Income

When federal spending grows faster than americans paychecks, the burden of government on taxpayers becomes greater. over the past four decades, median-income americans earnings have risen only 24 percent, while spending has increased 288 percent.

PerCeNt ChaNge IN INFLatIoN-adJuSted doLLarS (2012)

300%

+287.5%
1970: $926 billion 2010: $3.6 trillion

250%

200%

total Federal Spending

150%

100%

50%

Median household Income

+24.2%
1970: $41,358 2010: $51,360
2010

0% 1970 1975 1980 1985 1990 1995 2000 2005

Sources: U.S. Census Bureau and Oce of Management and Budget.

Federal Spending Chart 3 Federal Budget in Pictures 2012

heritage.org

What if Families Handled Finances Like the Federal Government Does?

In 2010, median family income was $51,360. If a typical family followed the federal governments lead, it would spend $73,319 and put 30 cents of every dollar spent on a credit card. this family would have racked up $325,781 in credit card debtlike a mortgage, only without the house. What credit card company would continue lending money to this family?

INFLatIoN-adJuSted doLLarS (2012) If a typical family spent like the government, it would spend $73,319 (equivalent to $3.6 trillion) ... ... even though it had only earned $51,360 ($2.5 trillion)... That deficitand borrowing to pay for itwould be a part of its growing family debt of $325,781 ($16 trillion).
Each block represents $1,000

... which would leave it with a one-year decit of $21,959 ($1.08 trillion).

Sources: Congressional Budget Oce and U.S. Census Bureau.

Federal Spending Chart 4 Federal Budget in Pictures 2012

heritage.org

Mandatory Spending Has Increased Nearly Six Times Faster than Discretionary Spending
Mandatory spending primarily entitlements and interestis set on budgetary autopilot, growing without congressional debate. It has increased almost six times faster than discretionary spending, including defense, which is the part of federal spending subject to annual budgets.

INFLatIoN-adJuSted doLLarS (2012)

$4 trillion

2012: $3.57 trillion total (Mandatory spending: 63%)

$3 trillion

$2 trillion

1965: $633.6 billion total (Mandatory spending: 29%)

$1 trillion

Discretionary

Mandatory
$0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: Oce of Management and Budget.

Federal Spending Chart 5 Federal Budget in Pictures 2012

heritage.org

Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Decits
the main driver behind long-term decits is government spending, not low revenue. While revenue will surpass its historical average of 18.1 percent of gdP by 2018, spending remains above its historical average of 20.2 percent, reaching 22.1 percent by 2022, even after $2.1 trillion in spending cuts in the Budget Control act.

PerCeNtage oF gdP
28% 26% 24% 22% 20%

Spending

2012: 23.3%

2022: 22.1%

averages, 1960 2008: Spending 20.2%

2022: 18.3%
18% 16% 14% 12%

Revenue 18.1%

Revenue

2012: 16.1% Actual Projected

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Heritage Foundation calculations based on Congressional Budget Oce data.

Federal Spending Chart 6 Federal Budget in Pictures 2012

heritage.org

Medicare and Other Entitlements Are Crowding Out Spending on Defense

ever-increasing entitlement spending is putting pressure on key spending priorities, such as national defense, a core constitutional function of government. defense spending has declined signicantly over time, even when the wars in Iraq and afghanistan are included, as spending on the three major entitlementsSocial Security, Medicare, and Medicaidhas more than tripled.
Source: Oce of Management and Budget.

PerCeNtage oF gdP
10%

8%

7.4%
6%

1976 was the rst year entitlement spending exceeded defense spending

Medicare, Medicaid, and Social Security

Entitlements

2012: 9.7%

4%

Defense

2012: 4.5%

2.5%
2% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Note: 2012 figures estimated.

Federal Spending Chart 7 Federal Budget in Pictures 2012

heritage.org

National Defense Spending Would Plummet Under Obamas Budget

President obamas lean defense strategy would create a hollow force and exacerbate todays readiness crisis. decreases in funding for the core defense program mean losing capabilities that are crucial for the military to fulll its constitutional duty to provide for the common defense.

PerCeNtage oF gdP
10%

9.5%

8%

6%

2012: 4.5%
4%

Post-9/11 average:

4.1%
2022: 2.5%

2%

0% 1965 Source: Oce of Management and Budget. 1970 1975 1980 1985 1990

Actual Projected
1995 2000 2005 2010 2015 2020

Federal Spending Chart 8 Federal Budget in Pictures 2012

heritage.org

Budget Control Act Sequestration Would Hit Defense Hardest

the Budget Control acts $1.2 trillion automatic sequestration cuts, out of $46.3 trillion in total spending, would impose draconian cuts on defense (on top of an estimated $407 billion in cuts from its spending caps). this would slash the defense budget and jeopardize the u.S. militarys ability to defend the nation. entitlement spendingthe biggest part of the budget would scarcely be touched by comparison.
Source: Congressional Budget Oce.

NoMINaL doLLarS Entitlement Spending Non-Defense Discretionary Spending $26.1 trillion $11.3 trillion $5.3 trillion
$171 billion $322 billion $492 billion Total Spending, 20132021 Budget Authority Cuts due to sequestration

Defense Spending

Net Interest $3.6 trillion

$169 billion

Share oF totaL SeQueStratIoN CutS

14.8%
Entitlement Spending

27.9%
Non-Defense Discretionary Spending

42.6%
Defense Spending

14.6%
Net Interest

Federal Spending Chart 9 Federal Budget in Pictures 2012

heritage.org

10

Obama Budget Would Make Defense the Lowest Budget Priority

President obamas budget would lower defense spending below other major budget priorities, forcing cuts to personnel levels and weakening military readiness. By 2018, the u.S. would spend more on interest on the debt than on protecting the country.

NoMINaL doLLarS
$3.0 trillion

$2.5 trillion

Medicare, Medicaid, and Social Security

$2.0 trillion

$1.5 trillion

all other Spending

$631 billion

$1.0 trillion

Net Interest

$0.5 trillion

Defense
$602 billion

$0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: Oce of Management and Budget.

Federal Spending Chart 10 Federal Budget in Pictures 2012

heritage.org

11

More than Half of All Federal Spending Will Be on Entitlement Programs in 2012
Medicare, Medicaid, and Social Securityalong with other entitlements such as food stamps, unemployment, and housing assistance make up 62 percent of all federal spending. In contrast, spending on foreign aid represents about 1 percent.

PerCeNtage oF FY2012 SPeNdINg

Entitlement Programs

62%

Medicare, Medicaid, and other health Care

22%

21%

Social Security

Welfare Programs and other entitlements

19%

all other Spending 8%

50%

National defense 19% Net Interest 6% education 4% Foreign aairs 1%

Source: Oce of Management and Budget.

Federal Spending Chart 11 Federal Budget in Pictures 2012

heritage.org

12

Total Welfare Spending Is Rising Despite Attempts at Reform

total means-tested welfare spending (cash, food, housing, medical care, and social services to the poor) has increased more than 17-fold since the beginning of Lyndon Johnsons War on Poverty in 1964. though the current trend is unsustainable, the obama administration would increase future welfare spending rather than enact true policy reforms.

INFLatIoN-adJuSted doLLarS (2011)

$1 trillion

2011: $910 billion

1996
$800 billion

$600 billion

1981 1964
War on Poverty begins reagan slashes welfare

reform ends welfare

$400 billion

$200 billion

$0 1950 1960 1970 1980 1990 2000 2010

Source: Heritage Foundation calculations based on data from current and previous White House Oce of Management and Budget documents and other ocial government sources. Federal Spending Chart 12 Federal Budget in Pictures 2012 heritage.org

13

More than 70 Percent of Federal Spending Goes to Dependence Programs

government dependence is driving budget decits and federal debt. More than 70 percent of federal spending goes to 47 government dependence programs, including housing, farm subsidies, and the three largest entitlements, Medicare, Medicaid, and Social Security.

Share oF totaL FederaL SPeNdINg

80% 70% 60% 50% 40% 30% 20% 10% 0% 1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

2003: 68.3%

2010: 70.5%

1990: 48.5%

1962: 28.3%

Source: The Heritage Foundations Index of Dependence on Government.

Federal Spending Chart 13 Federal Budget in Pictures 2012

heritage.org

14

Cut Spending, Fix the Debt, and Restore Prosperity

By rapidly lowering total federal spending, Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity would balance the budget by 2021 and keep it balanced permanently, without raising taxes.

PerCeNtage oF gdP

CURRENT PROJECTIONS
35%

HERITAGE PLAN
35%

33.9%

30%

Spending

30%

25%

25%

20%

20%

Spending
18.5%

Revenue
15%

18.7%
15%

Revenue

17.6%

10% 2010 2015 2020 2025 2030 2035

10% 2010 2015 2020 2025 2030 2035

Sources: Current projections: Heritage Foundation calculations based on data from the Congressional Budget Oce (Alternative Fiscal Scenario). Heritage Plan: Calculations by the Center for Data Analysis based on data provided by the Peter G. Peterson Foundation. For more information, go to savingthedream.org. Federal Spending Chart 14 Federal Budget in Pictures 2012 heritage.org

15

Federal Revenue
Americas growing tax burden is a drag on the economy and will reach record levels without policy changes.

Taxes per Household Have Risen Dramatically

though the economic downturn has temporarily lowered overall tax revenues, the tax burden on americans is still high.

INFLatIoN-adJuSted doLLarS (2011)

$25,000

2000: $24,701

2007: $23,610

2011: $19,409

$20,000

$15,000 $11,554

1965:

$10,000

$5,000

$0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Sources: U.S. Census Bureau and Oce of Management and Budget.

Federal revenue Chart 1 Federal Budget in Pictures 2012

heritage.org

18

Top 10 Percent of Earners Paid 71 Percent of Federal Income Taxes

top earners are the target for new tax increases, but the federal income tax system is already highly progressive. the top 10 percent of income earners paid 71 percent of all federal income taxes in 2009 though they earned 43 percent of all income. the bottom 50 percent paid 2 percent of income taxes but earned 13 percent of total income. about half of tax lers paid no federal income tax at all.

PerCeNtage oF FederaL INCoMe taXeS aNd INCoMe earNed (2009) Top 1% 2%5% 5%10% 10%25% 25%50% Bottom 50%

This group of income earners ...

... earned this share of all income ... ... and paid this share of federal income taxes.

17%

15%

11%

23%

21%

13%

37%

22%

12%

17%

10%

2%

Source: Internal Revenue Service.

Federal revenue Chart 2 Federal Budget in Pictures 2012

heritage.org

19

Federal Revenues by Source

Most federal revenues come from individual taxpayers. Personal income taxes are the largest portion of total tax revenues. Social Security and Medicare payroll taxes are the second-largest source.

PerCeNtage oF totaL FederaL reVeNue (2011)

50% $1,091.5 billion

47.4%

40%

35.6%
$818.8

Total: $2.3 trillion

30%

20%

10%

7.9%
$181.1

5.7%
$131.3

3.1%
$72.4

0.3%
$7.4

0%

Individual taxes

Social Corporate Insurance taxes (Payroll)

Customs duties, Misc.

excise taxes

estate and gift taxes

Source: Congressional Budget Oce.

Federal revenue Chart 3 Federal Budget in Pictures 2012

heritage.org

20

U.S. Has the Highest Corporate Tax Rate

high federal and state corporate tax rates make it dicult for u.S. headquartered businesses to compete internationally. u.S. rates have been consistently higher than the average of industrialized nations. In april 2012, Japan reduced its corporate tax rate to 36.8 percent, making the u.S. total corporate tax rate the highest.

CoMBINed CorPorate taX rateS

42% 40% 38% 36% 34% 32% 30% 28% 26% 24% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (est.)

United States

39.26%
36.8% Japan

OECD average (comprises developed nations, such as Canada, France, United Kingdom, and Switzerland)

25.47%

Source: Organisation for Economic Co-operation and Development (OECD).

Federal revenue Chart 4 Federal Budget in Pictures 2012

heritage.org

21

Obamacares Barrage of Tax Hikes

obamacare imposes numerous tax hikes which total more than $500 billion over 10 years. obamacares higher tax rates on income and investment will slow economic growth, leaving hardworking american families and businesses worse o. a particularly harmful new payroll tax on investment income goes into eect in January 2013.

BILLIoNS oF NoMINaL doLLarS

$100

$101.5 $91.1
Tax on Cadillac plans

$80

$74.9 $68.7 $62.8

Individual and employer mandates

$60

Health insurance tax Increase in Medicare HI tax and application to investment income for high earners

$40

$37.9

$42.1

$20

$9.8
$0 Source: Joint Committee on Taxation.

$12.4

Fee on medical device manufacturers New restrictions and penalties on HSA and FSA accounts Fee on pharmaceutical companies Revenue from 8 other new taxes

$0.1
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Federal revenue Chart 5 Federal Budget in Pictures 2012

heritage.org

22

Obamas Budget Hikes Taxes by $2 Trillion

President obamas FY 2013 budget includes about $1.5 trillion in tax hikes. other proposals bring the true size of obamas tax hikes to over $2 trillion. this includes letting the Bush tax cuts expire for high-income earners and small businesses and imposing additional taxes on these groups. obama also proposes a higher death tax and the institution of new taxes, such as the punitive bank tax.

BILLIoNS oF NoMINaL doLLarS

$0 $500 billion $1 trillion $1.5 trillion

$1,433.1 tax increases on high-income earners and small businesses $147.5 higher taxes on businesses operating internationally $143.3 higher death tax $86.8 repeal inventory valuation rules $61.8 Increase unemployment insurance tax $61.3 Impose a bank tax $51.2 higher taxes on energy companies $98.0 IrS program integrity cap, insurance company tax increase, and other miscellaneous tax increases $75.3 New tax cuts

Sources: Heritage Foundation calculations based on data from the Oce of Management and Budget and the U.S. Department of the Treasury.

Federal revenue Chart 6 Federal Budget in Pictures 2012

heritage.org

23

Taxes Soaring Past Highest Level Ever

taxes are projected to increase rapidly under dierent policy scenarios. If the 2001 and 2003 tax cuts expire and more middle-income americans are required to pay the alternative minimum tax (aMt), taxes will reach unprecedented levels. the tax burden will climb even if those tax breaks are extended. President obamas budget, which cuts some taxes and raises others, increases the overall tax burden.

PerCeNtage oF gdP
24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12%

highest tax burden in u.S. history: 20.6% (2000)

TAX CUTS EXPIRE (current law)

OBAMA BUDGET FY 2013

hIStorICaL taX reVeNue

average tax Burden (1959 2008): 18.1%

Tax cuts made permanent, AMT xed

Actual

Projected

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Sources: Heritage Foundation calculations based on data from the Congressional Budget Oce and Oce of Management and Budget.

Federal revenue Chart 7 Federal Budget in Pictures 2012

heritage.org

24

Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts
tax cuts can create incentives for individuals to work, save, and invest, which can generate more revenue. the most dramatic decline in the top individual income tax rate, from 70 percent to 28 percent, occurred during the reagan administration, during which tax receipts remained relatively constant as a share of the economy.

PerCeNtage oF gdP
100%

91%

75%

70% 50%

toP INdIVIduaL taX rate

28% 39.6% 35% 35%

50%

25%

INdIVIduaL taX reCeIPtS

7.8%
1960

0%

7.1%
1965 1970 1975

9.2%
1980 1985

8%
1990

7.7%
1995 2000

7.2%
2005

7.5%
2010 2012* * Projected

Sources: Oce of Management and Budget and the Tax Foundation.

Federal revenue Chart 8 Federal Budget in Pictures 2012

heritage.org

25

Tax Revenues Return to Historical Average

Since World War II, tax receipts have averaged around 18.1 percent of gdP. receipts have fallen due to the recession, but as the economy recovers, they will rise above the historical average level by the end of the decade, even if all the 2001 and 2003 tax cuts are made permanent.

PerCeNtage oF gdP
25%

1945: 20.4%
20%

average historical revenue (19592008): 18.1%

2000: 20.6% 2022: 18.3%

15%

1950: 14.4%

2010: 15.1%

Actual
10% 1945 1950 1960 1970 1980 1990 2000 2010

Projected
2020 2022

Sources: Oce of Management and Budget and Congressional Budget Oce (Alternative Fiscal Scenario).

Federal revenue Chart 9 Federal Budget in Pictures 2012

heritage.org

26

Heritages New Flat Tax Simplies the Tax System

the heritage Foundations New Flat tax (NFt), part of Saving the American Dream, replaces todays complex tax system with one that is simple and fair. the New Flat tax would help more americans save and invest, and it would encourage economic growth without raising taxes.

MargINaL taX rateS (2012)

40.3% 25.0%
Income Tax

30.3% 15.0% 15.3%

Payroll Tax Income Tax

28%

15.3%

Payroll Tax

TYPICAL TAX RATES TODAY

In these two examples, total marginal tax rates include individual income and payroll taxes.
Sources: Heritage Foundation calculations and the Internal Revenue Service.

NEW FLAT TAX

the NFt replaces all income, payroll, and death taxes, and a slew of excises.

Federal revenue Chart 10 Federal Budget in Pictures 2012

heritage.org

27

Debt and Deficits

Excessive spending has created record levels of debt and deficits, and the worst is yet to come, threatening opportunity and prosperity for younger generations.

Publicly Held Debt Set to Skyrocket

runaway spending on Medicare, Medicaid, and Social Security will drive federal debt to unsustainable levels over the next few decades. total national debt consists of publicly held debt and intergovernmental debt. Intergovernmental debt is the amount that the government owes to specic programs or agencies, such as the Social Security trust Fund. Publicly held debt is more relevant to credit markets.

PerCeNtage oF gdP
200%

2036: 195%

150%

World War II 1946: 108.6%

100%

2021: 101% Global Recession War on Terrorism

Great Depression World War I

50%

0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2036 Sources: Heritage Foundation calculations based on Oce of Management and Budget and Congressional Budget Oce data.

Debt and Decits Chart 1 Federal Budget in Pictures 2012

heritage.org

30

Each Americans Share of Publicly Held Debt Is Skyrocketing

as Washington continues to spend dramatically more than it can aord, every american will be on the hook for increasing levels of debt. Without reining in spending, the amount of debt per citizen will skyrocket.

INFLatIoN-adJuSted doLLarS (2012)

$150,000

2036: $135,547
$120,000

2031: $102,108
$90,000

$60,000

2012: $36,267
$30,000

2001: $14,534

1970: $6,435
$0 1970 1980 1990 2000

Actual Projected
2010 2020 2030 2036

Sources: U.S. Census Bureau and Congressional Budget Oce (Alternative Fiscal Scenario).

Debt and Decits Chart 2 Federal Budget in Pictures 2012

heritage.org

31

Obamas Budget Fails to Solve the Debt Crisis Despite $2 Trillion in Tax Hikes
In 2008, publicly held debt as a percentage of the economy (gdP) was 40.5 percent, nearly four points below the post-World War II average. Since then, the debt has increased by 45 percent. the Presidents FY 2013 budget would increase the debt to 76.5 percent by 2022, despite $2 trillion in tax hikes.

PerCeNtage oF gdP
120%

1946: 108.7%
100%

2012: 74.2%
80%

2022: 76.5%

Post-WWII average: 44.2%

60%

1993: 49.3%

2008: 40.5%

40%

20%

0% 1940 1950 1960 1970 1980 1990 2000 Sources: Congressional Budget Oce and Oce of Management and Budget.

Actual Projected
2010 2020

Debt and Decits Chart 3 Federal Budget in Pictures 2012

heritage.org

32

Obamas Budget Continues Unprecedented Decits

the President is responsible for submitting an annual budget to Congress and has the authority to veto legislation, including irresponsible spending. Most administrations have run small but manageable decits, but President obamas unprecedented budget decits pose serious economic risks.

Budget deFICItS aS a PerCeNtage oF gdP, BY adMINIStratIoN

0%

Kennedy y Johnson J n Nixon

Ford

Carter Reagan

Bush

Clinton

Bush

Obama

0.1% 1.0% 0.9% 1.6% 2.4% 3.5% 4.3% 4.3% 3.2%

2%

4%

6%

8%

8.3%
Source: Oce of Management and Budget.

Debt and Decits Chart 4 Federal Budget in Pictures 2012

heritage.org

33

Federal Budget Decits Will Reach Levels Never Seen in the U.S.
unless entitlements are reformed, spending on Medicare, Medicaid, and Social Security will drive decits to catastrophic levels. While recent budget decits have reached unprecedented levels, future decits will be dramatically worse.

PerCeNtage oF gdP
60%

2085: 57.5%

50%

40%

30%

20%

2000: 2009: 2.4% 10.1% historical average (19592008): 2.1%

10%

0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Source: Congressional Budget Oce (Alternative Fiscal Scenario).

Debt and Decits Chart 5 Federal Budget in Pictures 2012

heritage.org

34

Rising Decits Drive U.S. Debt Limit Higher, Faster

the Budget Control act, a result of the contentious 2011 debt ceiling debate, increased the debt limit by $2.1 trillion, but failed to rein in the key driver of spending and debt: entitlement spending. Congress rst placed a statutory limit on the national debt in 1917, in the Second Liberty Bond act. It has been raised 13 times since 2001.

NoMINaL doLLarS

2012: $16.39 trillion

Budget Control act, 2012: +$1.2 trillion Budget Control act, 2011: +$900 billion Largest one-year change: +$1.9 trillion, 2010 Since 2001, the debt limit has been raised 13 times, for a total of $10.4 trillion

$16 trillion n $14 trillion n $12 trillion n $10 trillion n $8 trillion n $6 trillion n $4 trillion n n $2 trillion $0 0 1940

unchanged for 5 years, 19972001 ($5.95 trillion)

1950

1960

1970

1980

1990

2000

2012

Note: Figure for 2012 is current as of April 6. Sources: Congressional Research Service, U.S. Treasury, and Oce of Management and Budget.

Debt and Decits Chart 6 Federal Budget in Pictures 2012

heritage.org

35

Interest On the Debt Will Nearly Double Over the Next Decade
as the publicly held debt grows, net interest payments will increase dramatically, even assuming that interest rates remain low. under current projections, real net interest costs would more than double over the next decade.

INFLatIoN-adJuSted doLLarS (2012)

$500

2022: $524 billion

$400

1990: $294 billion

$300

2012: $224 billion

$200

$100

$0 1990 1995 2000 2005

Actual Projected
2010 2015 2020 2022

Sources: Congressional Budget Oce and Oce of Management and Budget.

Debt and Decits Chart 7 Federal Budget in Pictures 2012

heritage.org

36

Interest on the Debt Exceeds Spending for Many Programs

In 2011, the u.S. spent more on net interestinterest paid on publicly held debtthan it spent on many federal departments, including education and Labor.

BILLIoNS oF doLLarS (2011)

$250

$227.1

$200

$150

$139.4 $132.0 $126.9 $77.3 $65.5

$100

$50

$45.7

$0

Net Interest

Department of Department of Department of Department of Department of Department of Agriculture Labor Veterans Transportation Education Homeland A airs Security

Source: Oce of Management and Budget.

Debt and Decits Chart 8 Federal Budget in Pictures 2012

heritage.org

37

U.S. Debt on Track to Fuel Economic Crisis

Many european countries, like greece and Italy, are suering nancial or budget crises as a result of mounting debt. Countries such as Spain are not far behind. unless the u.S. controls spending, americas debt will surpass those of troubled nations, leading to similar economic woes.

PerCeNtage oF gdP
200%

131% 153%
150%

Japan

greece

2035: U.S. debt at 187% GDP

73%
100%

u.k.

100%
A TR BT E S. D

Italy

Y OR T JEC

56%
50%

Spain

U.

2011: U.S. debt at 67% GDP (Credit rating downgraded by S&P) 2000: U.S. debt at 34% GDP
2000 2005 2010 2015 2020 2025 2030 2035

0%

Comparisons are to other nations 2011 levels of debt.

Sources: International Monetary Fund and Congressional Budget Oce (Alternative Fiscal Scenario).

Debt and Decits Chart 9 Federal Budget in Pictures 2012

heritage.org

38

Debt to Grow Unless Government Spending Is Reduced

Without signicant spending reforms, publicly held debt is projected to reach 187 percent of gdP by 2035. under the heritage plan, Saving the American Dream, future federal spending would be reduced by about half, which would dramatically lower the debt to 29 percent of gdP.

PerCeNtage oF gdP
200%

CurreNt ProJeCtIoNS
150%

187%

2035:

100%

68%

2011:

50%

SaVINg the aMerICaN dreaM

29%

2035:

0% 2010 2015 2020 2025 2030 2035

Sources: Current projections: Congressional Budget Oce (Alternative Fiscal Scenario). Heritage Plan: Calculations by the Center for Data Analysis based on data provided by the Peter G. Peterson Foundation. For more information, go to savingthedream.org. Debt and Decits Chart 10 Federal Budget in Pictures 2012 heritage.org

39

Entitlements
Medicare, Medicaid, and Social Security spending is set to explode, placing enormous pressure on other priorities such as defense and the rest of the budget.

Entitlement Spending Will Nearly Double by 2050

Spending on Medicare, Medicaid, Social Security, and the obamacare subsidies will soar as 78 million baby boomers retire and health care costs climb. total spending on federal health care programs will more than double. Future generations will be left with an untenable debt burden.

PerCeNtage oF gdP
20%

17.4%
15%

19.0%
5.9%

total

15.3% 10.3%
4.8%

12.1%
5.2%

6.0%

Social Security

6.0%

10%

3.4% 2.7% 4.2%

2020

4.0%

4.5%

Medicaid, obamacare Subsidies

5%

1.9% 3.6%

5.9%
2030

7.4%

8.6%

Medicare

0%

2010

2040

2050

Source: Congressional Budget Oce (Alternative Fiscal Scenario).

Entitlements Chart 1 Federal Budget in Pictures 2012

heritage.org

42

Tax Revenues Devoured By Medicare, Medicaid, and Social Security in 2045

Spending on Medicare, Medicaid, the obamacare subsidies, and Social Security will devour all revenues by 2045. entitlement spending is already crowding out vital constitutional functions, such as defense.

PerCeNtage oF gdP
30%

2045: Entitlement spending matches tax revenue average

25%

2085: 25.7%

actual revenue

20%

average historical revenue: 18.1%

Social Security Medicaid, obamacare Subsidies, ChIP

15%

1970: 3.9%
10%

2011: 10.4%

Medicare
5%

0% 1970

Actual Projected
1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2085

Source: Congressional Budget Oce (Alternative Fiscal Scenario).

Entitlements Chart 2 Federal Budget in Pictures 2012

heritage.org

43

Medicare Adding to Federal Decits Faster than Other Government Spending Programs
entitlement spending is the main cause of long-term runaway federal decits. Medicare is the fastest-growing program due to retiring baby boomers, the eects of an aging population, and rising healthcare costs.

PerCeNtage oF gdP
14%

12%

10%

Medicare
all other Non-Interest Spending Social Security Medicaid, obamacare Subsidies

8%

6%

4%

2%

0% 2011 2015 2020 2025 2030 2035 2040 2045 2050

Source: Congressional Budget Oce (Alternative Fiscal Scenario).

Entitlements Chart 3 Federal Budget in Pictures 2012

heritage.org

44

Social Security Decits are Permanent and Growing

Social Security began running decits in 2010, paying out $48.9 billion more in benets than it received through payroll taxes. Nor will these decits ever end, meaning that without reforms, Social Security will continue to add billions to the decit and debt each year.

BILLIoNS oF doLLarS (2011)

$100 $50 2010 $0 1987 1990 $50 $100 $150 $200 $250 $300 $350 1995 2000 2005 2015 2020 2025 2030 2035

Surplus Deficit

2010: $48.9 billion decit

2035: $344 billion decit

Source: Social Security Administration (OASI and DI Trust Fund Data and 2011 Trustees Report).

Entitlements Chart 4 Federal Budget in Pictures 2012

heritage.org

45

Without Entitlement Reform, Federal Spending Will Exceed 40 Percent of the Economy by 2050
the major entitlements Medicare, Medicaid, the obamacare subsidies, and Social Securityare pushing spending to unsustainable levels. these programs must be restructured to prevent crippling debt or tax burdens on future generations.

PerCeNtage oF gdP 2050: 42.8%

40%

actual revenue
30%

average historical revenue (1959 2008): 18.1%

Net Interest

other
20%

defense Social Security

10%

Medicaid, obamacare Subsidies, ChIP Actual Projected

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Medicare

0%

2000

Source: Congressional Budget Oce (Alternative Fiscal Scenario).

Entitlements Chart 5 Federal Budget in Pictures 2012

heritage.org

46

Discretionary Spending Cuts Alone Will Not Balance the Budget

annual spending on entitlement programs is massive compared to other federal spending priorities. Cutting discretionary spending is necessary, but cuts to foreign aid alone or pulling out of afghanistan will not close the decit. entitlement programs must be reformed.

aNNuaL SPeNdINg (2012)

Entitlements
(Medicare, Medicaid, Social Security, and other mandatory programs, plus their net interest)

Corporation for Public Broadcasting $445 million global War on terrorism $115.1 billion Foreign aid $24.2 billion NaSa $17.6 billion

$2.48 TRILLION

Source: Oce of Management and Budget.

Entitlements Chart 6 Federal Budget in Pictures 2012

heritage.org

47

Even Eliminating Defense Spending Completely Would Not Balance the Budget
unsustainable entitlement spending is the key driver of future decits. rather than tackle them directly, some would cut defense. But even if spending on this crucial national priority was eliminated completely, entitlements would continue to drive decits to unmanageable levels.

PerCeNtage oF gdP
35%

total Spending Actual Revenue

30%

total Spending with No defense Spending Beginning in 2013

33.8%

Net Interest

25%

20%

Historical Revenue: 18.1%

all other Spending Social Security

15%

10%

DEFENSE

Medicaid, obamacare Subsidies, ChIP Medicare

5%

0% 1975 1980 1990 2000 2010 2020 2030 2040 2050

Source: Heritage Foundation calculations based on Congressional Budget Oce data.

Entitlements Chart 7 Federal Budget in Pictures 2012

heritage.org

48

Letting Tax Cuts Expire Will Not Balance the Budget

Some call for letting all 2001 and 2003 tax cuts expire, including subjecting the middle class to the alternative minimum tax, in order to balance the budget. under this scenario, unaordable spending would still rise, and economic growth and job creation would suer.

PerCeNtage oF gdP
30%

2 2055: 29.9% historical r 18 1% revenue: 18.1% revenue Spending

nding it Spe Defic

Net Interest

25%

other defense Social Security Medicaid, obamacare Subsidies, ChIP Medicare

20%

15%

10%

5%

0% 2000 2005 Source: Congressional Budget Oce.

Actual Projected
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Entitlements Chart 8 Federal Budget in Pictures 2012

heritage.org

49

Balancing the Budget Without Cutting Spending Would Cause Taxes to Skyrocket
america is running massive decits, and a balanced budget requirement is often considered a way to rein in red ink. Without serious entitlement and spending reforms, the level of taxes required to balance the budget would reach economically stagnating levels.

PerCeNtage oF gdP
30%

actual Spending

actual revenue

revenue Needed to Balance Budget

2036: 27.4% Net Interest

25%

20%

2013: 23.2%

all other Spending

15%

2012: 16.2%
10%

Social Security Medicaid, obamacare Subsidies, ChIP Medicare

5%

0%

Actual Projected
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Source: Heritage Foundation calculations based on Congressional Budget Oce data (Alternative Fiscal Scenario).

Entitlements Chart 9 Federal Budget in Pictures 2012

heritage.org

50

Hiking Taxes to Balance the Budget Would Require Doubling Tax Rates
The costs of Medicare, Medicaid, and Social Security are rising substantially. Paying for this spending solely through federal income tax increases would require more than a two-fold increase of current tax rates, even for the lowest tax bracket.

MARGINAL INCOME TAX RATES

100%

88%
80%

88%

63%
60%

66%

66%

47%
40%

35% 25% 25%

35%

20%

19% 10%

0%

2008 2050 2082

2008 2050 2082

2008 2050 2082

2008 2050 2082

Lowest Bracket
Source: Congressional Budget Oce.

Middle Bracket

Highest Bracket

Corporate Taxes

Entitlements Chart 10 Federal Budget in Pictures 2012

heritage.org

51

Taxing the Wealthy to Balance the Budget Will Not Work

Some argue for taxing the wealthy to reduce federal decits. however, hiking taxes on taxpayers in the two highest brackets would increase their tax rates to mathematically impossible levels. to close the 2035 decit, the top two tax rates would increase to 159 percent and 166 percent, and in 2050 they would reach 236 percent and 246 percent.

CurreNt taX rateS aNd taX rateS NeCeSSarY to CLoSe deFICIt

250%

236%
200%

246%

150%

159% 166%

100%

50%

0%

33%
SecondHighest Bracket

35%
Highest Bracket SecondHighest Bracket Highest Bracket SecondHighest Bracket Highest Bracket

CURRENT TAX RATE

RATES NEEDED TO CLOSE THE DEFICIT IN 2035

RATES NEEDED TO CLOSE THE DEFICIT IN 2050

Sources: Internal Revenue Service and Congressional Budget Oce (Alternative Fiscal Scenario).

Entitlements Chart 11 Federal Budget in Pictures 2012

heritage.org

52

Government Policy Reform Needed to Keep Spending Low and End Decits Without Raising Taxes
Bold, transformational reforms are needed to solve americas spending and debt crises. the heritage plan, Saving the American Dream, solves these crises through spending, entitlement, and tax reforms. It reduces the size of government, encourages personal scal responsibility, and fosters economic growth. It balances the federal budget by 2021 and does not raise taxes.

reVeNue aNd SPeNdINg aS a PerCeNtage oF gdP

25%

2011: 24.7%

20%

SPeNdINg reVeNue

Net Interest
15%

all other defense

10%

5%

entitlements (Medicaid, Medicare, Obamacare Subsidies, Social Security)

2010 2015 2020 2025 2030 2035

0%

Sources: Heritage Foundation calculations by the Center for Data Analysis based current projections, data provided by the Peter G. Peterson Foundation, and CDA policy models. Entitlements Chart 12 Federal Budget in Pictures 2012 heritage.org

53

he charts in this publication are based primarily on data available as of February 2012 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of federal spending, revenue, and debt to 2011, while the charts using CBO data show both historical and projected growth from as early as 1940 to as far as 2085. Projections based on OMB data are taken from the Presidents budget for fiscal year 2013. The charts show annual data except where calculations are made for Administration averages. Debt limit data are based on the limit in effect at the end of the calendar year. All spending and revenue data are based on the federal fiscal year. Prior to 1976, the fiscal year was from July 1 to June 30. That year, the current format of October 1 to September 30 was implemented. In the charts, the transition is omitted for simplicity. Charts designating presidential Administrations begin with the fiscal year in which the Administration presented its first budget. In the case of 2009an atypical year in which much was spent before the Administrations first fiscal year budget (FY 2010), all revenue and spending up to the CBO January 2009 Budget and Economic Outlook is attributed to President George W. Bush. All revenue and spending thereafter is attributed to President Obama. There are different ways to calculate average historic levels of revenue, spending, and debt. Such averages vary due to the time periods covered. In this publication, these averages span 50 years (1959 2008), encompassing postWorld War II and preGreat Recession years.
54

Technical Notes

Authors
Emily Goff Research Associate, Thomas A. Roe Institute for Economic Policy Studies Romina Boccia Research Coordinator, Thomas A. Roe Institute for Economic Policy Studies John Fleming Senior Data Graphics Editor

55

The Entitlements Initiative is one of 10 Transformational Initiatives making up The Heritage Foundations Leadership for America campaign. For more products and information related to this initiative or to learn more about the Leadership for America campaign, please visit heritage.org.

The Heritage Foundation is a research and educational institutiona think tankwhose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Our vision is to build an America where freedom, opportunity, prosperity, and civil society flourish. As conservatives, we believe the values and ideas that motivated our Founding Fathers are worth conserving. As policy entrepreneurs, we believe the most effective solutions are consistent with those ideas and values.
56

The Federal Budget in Pictures Online

The Federal Budget in Pictures is available online with enhanced features. Go to heritage.org/FederalBudget Embed or download the entire book or individual charts for blogs and presentations Sign up to receive Budget Sense, a bi-weekly e-mail that delivers the latest on spending, taxes, and debt directly to your inbox Share charts with your social networks through Facebook, Twitter, and more View the interactive charts Read in-depth research on taxes, spending, debt, and the budget

Heritage.org/FederalBudget

214 Massachusetts Avenue, NE Washington, DC 20002-4999 (202) 546-4400 heritage.org