Friday, July 11, 2014

Fiscal policy update: revenue still strong

Fiscal policy is far from ideal, but there are some things that are moving in a positive direction. Our tax code needs to be drastically simplified, tax rates need to be lowered and flattened, and entitlement programs need profound restructuring. There's a lot to look forward to if Congress ever gets its act together. In the meantime, it is encouraging to see that federal spending has shrunk significantly relative to GDP, and federal revenues continue to march higher relative to GDP—thanks mainly to rising profits, expanding jobs, and increasing incomes. 


The current recovery is the only one in history to occur alongside zero growth in federal spending. Federal revenues, in contrast, have been rising steadily, something that is fairly typical of recoveries. Spending has not increased at all for the past five years, but revenues have climbed by almost $1 trillion. 


Spending as a % of GDP is back down to just over 20%, close to the average of the past several decades. Tax revenues are still shy of their long-term average, but they continue to rise relative to GDP. In the past year, federal revenues have posted growth of 8.6%, and they have grown at an annualized rate of 8.6% for the past four years.


Strong revenue growth in recent months is a good sign that the economy is nowhere near recession, as the -2.8% Q1/14 real GDP growth seemed to suggest. A weak economy simply does not generate this kind of growth in tax revenues. Corporate tax receipts have surged at a 15.7% annualized rate in the past four years. Think how much more they might increase if the corporate tax rate were slashed and trillions of overseas corporate profits were repatriated! As it is, corporate tax receipts totaled only $303 billion in the past 12 months, representing just 10.3% of total federal revenues. We ought to all but eliminate the corporate profits tax, since that would provide a much-needed incentive for more business investment and negative impact on the federal deficit could be recouped handsomely by the expanding jobs and incomes that would flow from increased investment.


The federal deficit has collapsed in the past four years, having fallen from over 10% of GDP to now just 3% of GDP. In dollar terms it has declined by almost two-thirds. Nobody expected this to happen back in 2009 and 2010. We were supposedly facing trillion-dollar deficits for as far as the eye could see. This is a very welcome development.

7 comments:

Benjamin Cohen said...

As always excellent commentary. Eliminating corporate income and dividend taxes is good. Pay for it by cutting federal defense spending and a serious gasoline tax.
Wipe out SSDI and VA. USDA we don't need.

Hans said...

No defense cuts; no gasoline tax increase with these weak economic times.

Yes, get rid of SSDI and the VA and the USDA, as well.

"We ought to all but eliminate the corporate profits tax, since that would provide a much-needed incentive for more business investment and negative impact on the federal deficit could be recouped handsomely by the expanding jobs and incomes that would flow from increased investment."

Mr Grannis, I fully concur! But we have idiots in CONgress and this is not likely to happen.

I do have bad news, however, the deficit will increase again when we normalize interest rates.

Paying on the debt is the third largest component of the Federal budget and costs will rise as debt levels and interest rise.

William said...

Hans - You make a very good point about US interest expense rising as the FED normalizes interest rates next year.

I am also concerned about what the actual costs of "Obamacare" will be. The Congressional Budget Office (CBO) typically underestimated the cost of large new federal programs.

Benjamin Cohen said...

Hans: The rise in debt service could be expensive. But it might not happen.
1. They are still waiting for a rise in interest rates in Japan after 22 years. ZLB is tricky...as Milton Friedman said, central banks cannot tighten their way to higher interest rates...not for long anyway...
2. John Cochrane has proposed converting national debt into bank reserves. Interest on reserves would be paid by Fed, not taxpayers. The sentiment that the Fed should not have a large balance sheet---more sing-song nonsense from who knows where.

Joseph Constable said...

A couple of thoughts.

The VA health care system is not bad compared to a system called Obamacare.

John Cochrane is too clever by twice as much.

It is all too complicated and too much resources are put into maintaining the massive amount of money floating around. I would keep SSDI, VA, USDA as bad as they are if they choice were to instead get rid of the IMF. It is more simple to default. And that is what the Millennial generation will do.

Benjamin Cohen said...

Joseph Constable:

The VA is publicly funded health care, in federally owned facilities, staffed by 300k federal employees, and provided absolutely free to former federal employees.

The VA is lifetime pensions and healthcare after 20 years of federal employment.

Or lifetime "disability" payments for maladies not received in combat.

All paid for out of income and capital gains taxes.

They have a bust of Karl Marx in the VA HQ lobby and fly the hammer & sickle flag outside.

But the right-wing loves it!

Obamacare looks like cut-throat free enterprise in comparison.

William McKibbin said...

The easiest way to simply taxes is to outlaw personal income taxes.