Wednesday, December 12, 2012

Washington needs to control spending, not raise tax rates

Federal government finances have been terribly unbalanced for the past four years, but the good news is that things are looking better, even as we approach the dreaded "fiscal cliff." The budget deficit peaked at $1.47 trillion in December 2009, equivalent to 10.5% of GDP. As of last month, the 12-month deficit had fallen to $1.1 trillion, or about 7% of GDP. That's welcome progress, and it has come about thanks to very slow growth in federal spending and a decent recovery in tax revenues spurred almost entirely by a growing economy.

As the chart above shows, the Great Recession was responsible for a 22% plunge (about $575 billion) in tax revenues. Since 2009, however, revenues have risen 22%, or about $455 billion. From the beginning of the Great Recession through today, federal spending has increased about $800 billion, while tax revenues are down only $120 billion. By far the largest factor driving the budget deficit, therefore, has been the surge in spending. Fortunately, that surge has not continued, but neither has it reversed, whereas the decline in revenues has reversed almost entirely.

As the chart above shows, individual tax receipts are up about $305 billion from the recession lows, accounting for two-thirds of the increase in total revenues. Corporate profits taxes have doubled over the same period, adding $120 billion to total revenues. All of this without any increase in tax rates.

The big message here is that federal revenues are highly sensitive to the health of the economy. They have risen strongly since the recovery began, despite the payroll tax holiday instituted almost two years ago, and revenues are likely to continue to increase as the economy continues to grow. It is spending that is still out of line. If Congress can control the growth of spending going forward, then the budget mess we're in will be resolved without the need for higher taxes on anyone. This is a very important point, since higher tax rates could jeopardize the health of the economy, and that in turn would slow or even reverse the ongoing gains in tax revenue. Balancing the budget only requires that we restrain the growth in spending; going forward, that will be especially important as concerns entitlement spending.


Benjamin Cole said...

My only complaint about this post is that I actually want tax cuts, not the status quo.

To cut income taxes, we need to reduce agency spending.

Below is list of federal agencies by employment. It gives you ad idea of what to cut.

Federal Employment By Agency

Defense 772,601
VA 304,665
Homeland Security 183,455
Justice 117,916
Treasury 110,099
USDA 106,867
Interior 70,231
H&HS 69,839
Transportation 57,972
Commerce 56,856
State 39,016
Labor 17,592
HUD 9585
Education 4452

You think the GOP will save us? How about the Dems?

Ron Paul looks better and better....

Gloeschi said...

What? Defense? Oh no, that would hurt employment in battle-ground states like Florida. [Suddenly, government spending is gooood and creates jobs]. And it would hurt private-equity investments in defense companies by Carlyle (where luminaries such as James Baker are making big bucks). Don't ruin my IRR, bro. Rather cut off those food stamps - it's getting annoying.

Benjamin Cole said...


It is sad when you see GOP'ers suddenly become Keynesians, and speak about the job losses associated with cuts in federal spending. Defense spending, that is.

They should leave that nonsense to the Dems.

netbacker said...

Since when has the US federal government become revenue constrained? Every dollar taxed is a dollar removed from the economy, it could have been someone else's income in the private sector.
You want to cut spending by reducing the number of people employed? Don't these government employees spend money into the economy? How does increasing the unemployment by reducing federal employees help improve the economy?

netbacker said...

Government deficits = private sector surplus.

William said...

Look how the trajectory of government spending accelerated upward during the Bush II 8 years from 2000 - 2008 - before the Great Recession hit us.

bt1138 said...

Republicans don't really care about deficits. They like deficits, it allows them to try to cut programs they don't like.

That's why W Bush flushed the surplus that Clinton left him. If you are a republican, God forbid that people could ever be allowed to believe government can be made to work.

And we can't cut defense because "scary things & bad people"

netbacker said...
This comment has been removed by the author.
netbacker said...

Look at the Private Savings during the same time.
Government spending = gross private savings.
It matches dollar for dollar.

Paul said...

"They like deficits, it allows them to try to cut programs they don't like.

That's why W Bush flushed the surplus that Clinton left him."

A)The Clinton surplus was phony. The debt increased every single yr of the Clinton presidency. However, the budget was closer to balance in the last few yrs of the 90's than it has been since.

B)Clinton left Bush a recession and a 9/11 attack that took care of most of that "surplus."

C) What programs did Bush cut that Republicans don't like? Bush's greatest failure was not aggressively cutting failed liberal programs.