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Fiscal Chart of the Day: Heritage Shows That Unprecedented Spending, Not Taxation, Is Our Real Problem

Fiscal Chart of the Day: Heritage Shows That Unprecedented Spending, Not Taxation, Is Our Real Problem

Monday, President Obama issued yet another call for a “balanced” approach to our budget crisis, which is of course Obamaspeak for tax increases combined with small or phantom cuts in spending (with the possible exception of very real cuts in defense).  This wording is calculated to make him seem reasonable and moderate, but the facts of our predicament say otherwise.  To the extent that we have a revenue problem, it is due to the recession, not low tax rates.  Our spending problem, however, is a problem of policy, and one that Obama has heightened to unprecedented levels – ones that even unprecedented, social-contract-rewriting levels of taxation cannot repair.

From the Heritage Foundation’s Budget Chart Book,  a chart describing our historical revenue – and spending – situation.

Over time, revenue has hovered around 18% of GDP, generally no more than plus or minus 2 percentage points. Revenue only once crossed 20% of GDP, and even then only briefly when the Clinton tax increases met the height of the tech bubble.  Think back to all the controversial tax policies of the last few decades – the Reagan Tax Cuts (and increases) Bush 41’s “No New Taxes” violation, Clinton’s massive tax hikes, the Bush (43) Tax Cuts (when discounted by the effects of the post-911 economic downturn) – in every case, insignificant in magnitude compared to the sorts of revenue required to bridge the fiscal chasm that Obama and the Democrats opened before us.  And these tax policy changes often affected large swaths of the population.  The Obama administration is selling the fantasy that there exists a reasonable solution that only raises taxes on the wealthy, corporations, private jet owners, and his shopworn rogue’s gallery of easily-scapegoated “others.”

It is true that federal revenue has crashed to unprecedentedly low levels during this latest recession (and the previous one), possibly compounded by Obama “stimulus” spending hidden in the tax code (which is part of our spending problem, not taxation, and in any event is temporary) and other recession-driven temporary measures.  However, since actual tax rates have remained relatively stable since before this last revenue crash, this drop is attributable directly and indirectly to the recession, not tax rates.  Certainly, the income tax rates paid by the wealthiest Americans were not altered during this time, as the rates remained the same and they were generally ineligible for Obama’s hidden spending. Either way, revenue is projected to recover on its own to around the historical average in a few years.

Besides, non-economist that I may be, I’m fairly certain that increasing taxes to make up for lost revenues in a recession violates the prescriptions of both Keynesian and supply-side economics. But I guess class warfare demagoguery can work as a political strategy even if it doesn’t work as an economic one.

The Obama administration’s profligate spending policies have jumped spending almost to 25% of GDP, and between the ObamaCare bomb and the Baby Boomer retirement entitlement bomb, the government’s share of the economy will continue grow to unmanageable levels.  We have a long-term, policy-driven spending problem and a short-term, economically-driven revenue problem, and until President Obama and the Democrats get serious about the spending mess they’ve got us into, no amount of even-sounding talk is going to get us out of it.

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Comments

DINORightMarie | August 11, 2011 at 8:21 am

“Besides, non-economist that I may be, I’m fairly certain that increasing taxes to make up for lost revenues in a recession violates the prescriptions of both Keynesian and supply-side economics.”

Sadly, Sen. Obama once said the same thing: August 09 Obama on raising taxes in a recession.

I would argue that we are in a 2nd Great Depression, but that is a tangent.

Great article!!! Thanks for the links and chart. And your commentary. 🙂

Re: spending mess–no amount of even-talking… Don’t you think they have us exactly where they want us? They are in a divide ands conquer mode…class warfare and government ownership of our lives. When we have over 80,000,000 government checks going out each month, many of those to the same households, do you honestly think DC wants that to change? It puts the power directly into their hands–both parties are responsible for this mess. They have NO INTEREST in “cleaning this mess”–you have to re-elect us so we can watch out for your interests.

Matthew Knee: However, since tax rates have remained relatively stable since before this last revenue crash, this drop should be attributed to the recession, not taxation.

According to your own graph, taxes were below average during the Bush Administration, hence, taxes are an important component. You are right, though, that spending is a significant problem over the long run, primarily due to entitlements; not new spending, but due to demographic changes and medical inflation.

Matthew Knee: Besides, non-economist that I may be, I’m fairly certain that increasing taxes to make up for lost revenues in a recession violates the prescriptions of both Keynesian and supply-side economics. But I guess class warfare demagoguery can work as a political strategy even if it doesn’t work as an economic one.

Cutting spending is also probably not the best policy choice, but it has to be balanced against the problem of debt. In this case, however, lenders are still willing to provide credit at very low rates, so debt reduction can wait. These are the problems facing the U.S.

Short term: jobs
Mid term: deficits
Long term: entitlements

To address these problems would mean running short term deficits, while reassuring the markets that the U.S. has a credible plan put in place that brings the budget back into line over the longer term. As the U.S. has tended to run deficits, it would make sense to try to restrain spending to 20%, and raise taxes to 20%. However, the U.S. political system is dysfunctional, and the Right refuses to even consider returning tax rates to Clinton levels, when the economy was growing and the budget was left with a structural surplus.

The U.S. simply has to decide how much government they want, then fund it.

    Weirddave in reply to Zachriel. | August 11, 2011 at 7:45 pm

    Fine Zach. You want to return tax levels to Clinton era “norms”? No problem. I’ll agree to that in a heartbeat.

    As long as we return spending to Clinton era “norms” as well.

    We got a deal?

That graph is a little deceptive. The last piece extrapolates out to 2021, we are currently at those historic low revenue rates of 14.8%.

Also, this statement doesn’t make a lot of sense “However, since tax rates have remained relatively stable since before this last revenue crash, this drop should be attributed to the recession, not taxation” considering this graph shows revenues as a percentage of GDP. The recession would have a downward pressure on nominal revenues, but it has a downward pressure on the nominal base GDP, so it would have no net effect on revenue rates.

    Qdizzle in reply to Awing1. | August 11, 2011 at 11:55 am

    Actually, revenues experience much more volatility than GDP during recessions. So using revenue drops as a percentage of GDP is still an accurate tool. If you look at the past few years of this recession, GDP is basically flat, while revenues have dropped significantly. The same thing happened during the tech bubble.

      Awing1 in reply to Qdizzle. | August 11, 2011 at 1:23 pm

      That’s because of considerable legislative changes to the tax code during recessions, not because of economic factors. For instance, during the recession, parent corporations to financial companies were allowed to take deductions for write offs that they normally wouldn’t be able to take a la GE.

The real problem facing the U.S. short, mid and long term is: a massively expanding welfare state.

The ONLY way to reduce the welfare state is to cut federal spending AND taxes.

The problem with the system as it now operates is a majority of Americans can vote for the benefits of the welfare state and never have to pay the costs. If they had to pay the costs the system would devolve into full-fledged socialism and inevitably, and in due course, collapse, as all such systems must.

Why must all such systems collapse? Because politicians pandor to the masses, designing and selling programs like ObamaCare which are structurally bankrupt.

Nancy Pelosi described the ObamaCare program to the masses as having “a cap on your costs, but no cap on your benefit.”

I invite any progressive to explain how capping costs but not benefits can lead to anything other than fiscal Armageddon.

You are right, though, that spending is a significant problem over the long run, primarily due to entitlements; not new spending, but due to demographic changes and medical inflation…

Your “demographics changes” projected over the next several decades is precisely the argument for reining in entitlement expectations and stifling, regulating government NOW if America is to rebound with a vibrant economy and empowered populution of producers, to include revenue producers.

it would make sense to try to restrain spending to 20%, and raise taxes to 20%. However, the U.S. political system is dysfunctional, and the Right refuses to even consider returning tax rates to Clinton levels, when the economy was growing and the budget was left with a structural surplus.

Cutting spending is also probably not the best policy choice…

You make a calculated nod or two toward the notion of reduced spending but nowhere do you suggest that Democrats put bona fide strutural cuts on the table. You stipulate to spending having risen due to medical inflation but don’t concede the obvious– that government monies and programs have seriously contributed to our skyrocketing healthcare costs, just as in the housing and university bubbles. No doubt you’re also a big proponent of Obamacare, an enormity which has already been scored to show it will be unconscionably unaffordable even using the most optimistic of projected numbers.

The U.S. simply has to decide how much government they want, then fund it.

Thinking people HAVE decided the extent of government they want and they’ve joined the TEA Party movement. Others may choose positive rights, race and class warfare resentments, and unsustainable entitlement spending, but there are not enough faux bleeding-heart billionaires to pay for the spiritual and financial hemorraging of our country.

Instead, we have paid Sorosbots on the net and media making precisely the kind of magical thinking, disingenuous comments you just did hoping for the suspension of disbelief for yet another election. Hey, this show’s dragged on for too long. We need to turn up the lights and get to work- me, after two more cups of coffee and a couple of more blogs :}

bleached cat: You make a calculated nod or two toward the notion of reduced spending but nowhere do you suggest that Democrats put bona fide strutural cuts on the table.

In fact, assuming the U.S. wants to keep their social safety net, fiscal balance will require cuts and taxes.

bleached cat: Thinking people HAVE decided the extent of government they want and they’ve joined the TEA Party movement.

As many in the Tea Party are claiming that taxes are historically high, when they are historically low, it’s not clear that they are thinking *clearly*. Surveys show strong support for Medicare and Social Security. In order to maintain these programs, the programs will need to be restructured and revenues increased.

[…] Not the inadequate tax revenues.     […]

Richard Dawson: It’s time to start the competition. Is everybody ready?

Audience and two families: [wild clapping and whooping]

Dawson: OK, then, let’s begin. One hundred audience members were surveyed on the following question: How do most Americans believe we should handle the national deficit and debt problem? Zachriel you’re up next.

Zachriel: My answer is, most Americans want to keep Medicare and Social Security, with some restructuring and more taxes on the rich, I mean, increased revenues and shared sacrifice, Richard!

Dawson: Okaaay. Let’s see how our respondents answered. Is “keeping Medicare and SS with some tinkering and more taxes” on the board? And the survey says, YES! It’s the number three answer with 31% of the vote!

[applause]

Dawson: And now for the other team. Bleached cat, it’s your turn at bat. There are two answers that can beat keeping current entitlements with some adjustments and higher taxes. What is your answer, think hard. Your families are tied and you need 32 points to win.

bleached cat: um, Richard, I think I’m going to have to go with, no, it’s too obvious and doesn’t involve fancy numbers and theory… Aw, heck, it’s all I can think of, so I’m going to say, “Repeal Obamacare, make real cuts in all discretionary spending, revamp entitlements to include means testing, downsize bureaucracy and eliminate certain departments, reduce and reverse a lot of regulation, encourage domestic drilling and small business, don’t raise but flatten taxes and simplify the code,” Richard!

bleached cat’s family: [clap clap] Yea!! Go for it, BC!

Dawson: Did bleached cat come up with a winning response? Is “Reduce, revamp, downsize, and eliminate government, and encourage production, fairer receipts” even on the board?? And the survey says, [dramatic pause], And there it is! The number two answer with 34 points, according to our polled sample!

Let’s see now what the number one response was!

[Loud ding]

Dawson: Support Tea Party candidates for less debt and more economic productivity, opportunity and liberty! is the number one answer with enough votes to swing the 2012 elections!!

Good game, folks! That’s our show for this week, and see you next fall at the polls!

Weirddave: You want to return tax levels to Clinton era “norms”? No problem. I’ll agree to that in a heartbeat. As long as we return spending to Clinton era “norms” as well.

You haven’t actually solved your problem yet. The population has increased, but more importantly, the population is aging, along with allowing medical inflation to run out of control. Add a couple of wars to the mix, and the budget is out of kilter. It’s going to require cuts and taxes.

bleached cat: Repeal Obamacare, make real cuts in all discretionary spending, revamp entitlements to include means testing, downsize bureaucracy and eliminate certain departments, reduce and reverse a lot of regulation, encourage domestic drilling and small business, don’t raise but flatten taxes and simplify the code,

Most of your items are largely irrelevant to the budget. The single largest threat is medical. People will need medical treatment, no matter what system is in place. The key is to rein in medical spending. Every large developed economy has some sort of universal care system. Without universal care, it will be next to impossible to control costs. The U.S. pays much more than any other developed economy for its health care, for only comparable results.

[…] Fiscal doom, now in handy, easy to follow chart form. Filed under: Bobos In Paradise, Capitalism, the Unknown […]

[…] have stressed this point on this blog, it’s not our tax rates, it’s the spending. That’s why we are screwed. But, more importantly your kids are […]

[…] Economy Rebounding?? – Today , 11:48 AM Fiscal Chart of the Day: Heritage Shows That Unprecedented Spending, Not Taxation, Is Our Real Probl… Fiscal Chart of the Day: Heritage Shows That Unprecedented Spending, Not Taxation, Is Our Real […]

[…] As for me, I’ll just bang the Rahn curve drum here again, and note that while gov’t spending may buy short-term growth it won’t help us in the long run, and that short-term fiscal candy is how we got into today’s ugly mess. […]

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