Six years ago the world was shocked by federal budget deficits that were forecast to be over $1 trillion per year for as far as the eye could see. Well, we've come a long way since then. By the end of next month, the federal budget deficit for the current fiscal year is likely to be about $420 billion, a mere 2% of GDP. If present trends continue (spending growth of 5% per year and revenue growth of 8%), next year's budget deficit could be as little as $380 billion, or just 1.7% of GDP. The secret to this remarkable change of fiscal fortunes? Spending restraint, coupled with booming individual and corporate income tax receipts. In short, a relative shrinkage of the public sector and a healthy expansion of the private sector.
These are impressive fundamentals which support the near-term outlook for the economy. They also offer the promise of even better things to come, since the government can easily "afford" to experiment with lower marginal tax rates on individuals and corporations.
Over the past six years, federal government spending has increased at a mere 1% annualized rate. Relative to GDP, spending has declined from 23.6% of GDP to 20.6%, which is right in line with its post-war average. Leviathan has been tamed, at least for now. Meanwhile, federal government revenues have increased at a 7% annualized rate. Relative to GDP, revenues have increased from 15% of GDP to 18.2% of GDP, which is also in line with its post-war average.
Individual income taxes (including capital gains taxes) and corporate income taxes have been the major drivers of revenue growth. Payroll taxes have been growing by a modest 4-5% per year, in line with the increase in jobs and personal incomes. Estate and gift taxes, in contrast, have declined by one-third over the past seven years, and in the past year they have totaled less than $20 billion, a puny 0.11% of GDP. (This is so small it would hardly register on the chart.) If we abolished the death tax, the impact on the deficit would be trivial—equivalent to a rounding error. Why can't we get rid of this tax? Our economy surely spends more trying to minimize this tax than the government receives from the tax—making it an absurd endeavor and a deadweight loss which hurts us all.