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As the following charts show, our biggest problem is too much spending, much more so than any shortfall of tax revenues.
Chart #1
Every taxpayer should frame Chart #1 and put it somewhere prominent. This shows the staggering increase in both federal spending and federal tax revenues in recent decades.
Chart #2
Chart #2 shows the major components of federal revenues, all of which—with the exception of the estate and gift tax—have surged in recent decades. Individual income tax receipts have almost quintupled since 1990! And by the way, eliminating the "death tax" would amount to a rounding error in the federal budget, since it collects only 0.6% of total federal revenues. Think of how much more efficient our economy would be if millionaires and billionaires stopped spending big bucks on tax attorneys in order to escape this onerous tax. The negative impact of this tax on the economy is an order of magnitude larger than the revenues it manages to generate.
Chart #3
Chart #3 shows federal spending and revenues as a percent of GDP. Note that spending has averaged a bit less than 20% of GDP since WWII, while today it is about 23% of GDP. Bringing it down is going to be difficult, since interest payments on federal debt now add up to more than $1 trillion per year (3.8% of GDP currently) and are rising (see Chart #4). Meanwhile, revenues have averaged about 17.5% of GDP over the same period, and are currently a bit less than 17%.
Note also that revenues have been a fairly constant share of GDP over the past 50 years, while income tax rates have been all over the map. Trump's 2018 tax cuts occurred at a time when revenues were about 16% of GDP, and since then they have surged both in real and nominal terms. Cutting tax rates does not necessarily add up to lost revenues. On the contrary, setting tax rates at lower and more reasonable levels can end up boosting tax revenues by stimulating investment and boosting the economy's productivity.
Chart #4
Today's edition of Steve Moore's Hotline (see bullet point #2) makes an important point which should be added to this discussion. "... even if you taxed every penny of income earned by millionaires, it wouldn't be enough to close the deficit." That refers to the current deficit, not the total debt owed to the public, which is closing in on $30 trillion.
Steven Hayward, one of the contributors to the excellent Powerline blog, notes that it is NOT true that "the rich enjoy lower tax rates than the middle class." In fact, "The rich already pay higher federal tax rates. Those with higher income pay a larger share of the tax burden than their share of national incomes.”
UPDATE (10/23/24): Chart #5 below provides proof for my assertion above ("Cutting tax rates does not necessarily add up to lost revenues.)
Chart #5
6 comments:
Scott, we often hear that consumption financed by debt is future consumption brought forward. So isn't reported GDP actually the total of real current production plus this future production? What would GDP trends look like if current account deficit was subtracted?
The current account deficit is meaningless. We have had one for many decades and it just persists. It's actually a good thing if you see it from the perspective of an investor: foreigners are using the proceeds of their sale of goods and services to us to invest in the US economy. A current account deficit is by definition a capital/investment surplus.
Scott, apologies. I meant current federal deficit, not current account deficit. And re your latest on individual net worth, I think I recall you saying that owning Treasuries adds to net worth, but per capita share of Federal debt is not subtracted. I do appreciate all that you share.
The best way to think about federal deficits is not to focus on the problem or cost of repaying it. That's because while the federal debt is a liability for the government, it is an asset for those who hold the debt. Debt payments are burdensome for the government, but they are a benefit for those holding the debt. It's best to think of federal deficits as a huge waste of the economy's resources. Government is taking money from the private sector and spending it in what is surely a very inefficient manner, thus squandering scarce and precious capital that might otherwise have been used more productively. "Too much debt is not the problem; the problem is too much spending."
I think the Y-axis is labeled incorrectly on the left of Chart #5 (Income Tax Revenues as a % of GDP). It looks like the percentages are for total tax revenues as a % of GDP.
Great article though, and I agree with you on the points you are making.
thanks Mark, I think you are right. I'm on the road right now and when I get back I will correct this. I don't think the message of the chart will change, however, since income tax revenues are the bulk of total revenues. Message: tax revenues do not necessarily correlate to tax rates. In fact, higher tax rates often produce lower revenues than lower tax rates.
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