Here’s a great way to kill a conversation at the next cocktail party you attend. Start talking about the US budget deficit.
You remember the deficit, right? It’s the difference between what the government collects and what it spends. In 2014, the US federal government spent $488 billion more than what it collected in revenues. In the last three months alone, we have racked up a deficit of $175 billion.
Nobody seems to want to talk about the deficit. It’s boring. It’s old news. And that’s not just the reaction from people you meet at cocktail parties. President Obama has yet to propose a balanced budget. Congress is no better. Senator Mitch McConnell has recently talked about “belt-tightening”, but he has refused to commit to achieve a balanced budget over the next 10 years.
Why should you care? A few weeks ago, the cumulative deficit – also known as the national debt – hit $18 trillion. That means every American owes about $56,000 to pay off our collective debt. Yep, that’s right. You are on the hook for $56,000. So is your mother… and your two year old niece… and don’t forget about your great aunt Matilda.
“OK, I get it,” you say. “But what can we do to fix the problem? The political process in Washington is so broken that no one can agree on what to do!”
Here’s a simple solution for eliminating the deficit – stop fraud in federal programs.
Wait. That’s it? Fix fraud, and we fix one of the biggest political challenges of our era? You’ve got to be kidding!
Nope. A closer look at the numbers reveals a solution that is hidden in plain sight.
Let’s start with the revenue side of the equation. By its own estimates, the IRS calculates that it fails to collect $385 billion each year in tax revenues. This “tax gap” comes from taxpayers who fail to file a return, report less income than earned, and exaggerate deductions and credits. There is even a small group of true delinquents – taxpayers who are unable or unwilling to pay what they owe.
Surprisingly, these estimates do not include a very significant source of revenue leakage – the underground economy. Tips. Cash payments. Paying employees “off the books”. Bartering. The IRS has no reliable way to estimate the size of the black market. So, they find it impossible to get a handle on how much tax revenue is lost each year.
On the expenditure side, the Office of Management and Budget tracks the estimated fraud rate for major federal programs. Their most recent estimate is that federal programs make $99.7 billion in payouts that they should not have. These improper payments come from Medicare, Medicaid, Social Security, and various social benefit programs.
Let’s add up all the numbers to get a complete picture. We’ve got a deficit of $488 billion. Fixing the $385 billion tax gap lowers that number to $103 billion. Stopping the $99.7 billion in improper payments lowers it even further to $3.3 billion. So we’re getting tantalizingly close, but a small deficit remains.
Here’s where the underground economy comes into play. The US economy generates about $17.5 trillion in economic activity every year. Let’s assume an underground economy of 1% of that total – or $175 billion (a very conservative estimate, by the way). Let’s also assume an effective tax rate of 15% on that $175 billion. The result is $26 billion in additional tax revenues, or enough to give us a slight surplus.
And that, my friends, is how fixing fraud can solve one of the greatest political challenges of our generation.
Now let’s get to work convincing government leaders to take decisive action in pursuing fraud and improper payments.
10% of $17.5 trillion is $1.75 trillion. Good article overall, but please fix this minor mistake by changing either the percentage or the total amount of the underground economy.
Ah... many thanks for catching my error! My intent was to say that the underground economy is 1% of the overall US economy... not 10%. And, as you likely know, that is a very, very conservative estimate.