Federal spending is the problem, not taxes

Given the upcoming elections and all the "disinformation" floating around,  it's worthwhile clarifying some of the facts behind fiscal policy. 

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.”