The editors of the Wall Street Journal, taking note of the trends in the graph above, argue that the United States does not have a tax problem but a spending problem:
You may have heard that the 2017 GOP tax cuts blew a giant hole in the federal budget—or so Democrats tell voters. The Congressional Budget Office’s revised 10-year budget forecast out Tuesday offers a reality check. Spending is the real problem, and it’s getting worse.
CBO projects that this year’s budget deficit will clock in at roughly $2 trillion, some $400 billion more than it forecast in February and $300 billion larger than last year’s deficit. This is unprecedented when the economy is growing and defense spending is nearly flat. The deficit this fiscal year will be 7% of GDP, which is more than during some recessions.
CBO says deficits will stay nearly this high for years, and the total over the next decade is now expected to total $21.9 trillion compared to $19.8 trillion in its February forecast. Debt held by the public will grow to 122.4% of GDP in 2034 from 97.3% last year.
Notably, CBO’s revenue projections are little changed. Revenue is expected to total 17.2% of GDP this year—roughly the 50-year average before the pandemic, as the nearby chart shows. But CBO significantly revised up projections for federal spending. Outlays are now expected to hit 24.2% of GDP this year and average 24% over the next decade. Wow.
You will note that although noisy federal tax revenues as a percentage of GDP have been remarkably stable. Federal tax revenues of roughly 17% are more than a “50 year trend”. That’s basically the post-war trend and marginal tax rates have made little difference.
There are a couple of ways of looking at that. One is that the Congress has carefully crafted the federal tax laws to return that percentage of GDP. Another is that 17% is what Americans are willing to pay in federal taxes. Beyond that they lobby, cheat, or otherwise arrange to limit their federal taxes to 17%. Those two are not mutually exclusive.
I would add that I think our problem is neither a tax problem nor a spending problem but either a consumption problem or a production problem (or both). Either we’re consuming too much or we’re not producing enough.
So, in 2034 total federal debt will be $35 T + $22 T = $57 T. And that’s assuming we don’t get into a major war or two or three, all of which the neocons are fomenting. Also, I thought the budget deficit was over $3 T, so shouldn’t that projected $22 T be $30 T to $40 T? $35 T + $40 T = $75 T.
Also, that ignores the end of the petro-dollar agreement with Saudi Arabia. What would the effect of an agreement between the Saudis and Chinese to establish a petro-yuan? The Saudis already accept payments in yuans and other currencies.
Speaking of BRICS, that organization currently comprises Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates. Saudi Arabia is not yet a member, but is still considering membership. Turkey has announced it will seek membership. All told another 60 or so countries have stated an interest in joining BRICS.
Does anyone still think the US is the world hegemon? Does anyone think the US economy is healthy?
People were willing to pay 20% in taxes in the late 90s. I dont think it is so much a matter of willingness as that the GOP is focused on cutting taxes and creating loopholes or cutting the IRS so they cant collect. So we have 2 parties that both increase spending and one party that is willing to try to increase taxes.
Steve
“People were willing to pay 20% in taxes in the late 90s.”
The surge in tax revenue was due to a cut in the capital gains tax rate, unlocking gains, and a technological boom. You can see what has happened since. The “people weren’t willing to pay.”
Meanwhile, the spend like drunken sailors response to the housing issue and Covid drove debt to dizzying levels.
“Either we’re consuming too much or we’re not producing enough.”
This is true by definition. But we can see that the spending splurges I just cited caused massive increases in the debt. Biden’s current and future spending plans, well, god help us. Debt service has become a problem.
As far as increasing output is concerned, that’s hard under any circumstances. Our current posture is not helpful in the least.
Link goes to cap gains rates. We had the same rates 81-86 as we did 97-03. We didnt see a large increase in revenue in the earlier period and revenues were already increasing before the cap gains cut.
What we did see was an increase in the top marginal rate with the addition of new tax brackets. In 92 we had 3 tax brackets with a top rate of 31% on those earning over $86k. In 93 a 36% rate was added at $140k and a 39.6% rate at $250 k. Note that tax revenues had a huge drop after 2000 that sustained until 2005, while we still had the low cap gains rate. It was actually lowered again in 2003, again not having much if any effect, maybe negative. (If you want to claim it takes a couple of years to take effect then that should also hold for the 97 cut, in which case it clearly hurt tax revenue.)
Steve
https://www.wolterskluwer.com/en/expert-insights/whole-ball-of-tax-historical-capital-gains-rates
The increase in marginal rates on income in the early in the 90’s retarded, and kept a rebounding economy tepid. Its clear, and widely acknowledged.
Citing a totally different period in the early 80’s is pure sophistry.
The late 90’s was characterized by the boom in venture capital (private equity). Partly due to capital gains treatment. Partly the internet boom.
Taxes are actually really easy. You want less of something? Tax it. You can believe in perpetual motion machines if you like, steve. Its a free country. But you beclown yourself. You really need to address Dave’s core point. For whatever reason, about 17% of GDP seems to cap out people’s toleration for fed taxation.
Currently the download to state and local taxing is, in sympathy, causing huge changes in population and business location. Economics isn’t physics, but its directional.
“I would add that I think our problem is neither a tax problem nor a spending problem but either a consumption problem or a production problem (or both)”
I think the problem is related but not quite that one. Its that we aren’t getting the value for the money the government is spending.
As a prosaic example, New York 2nd ave subway is esimated to cost $17 billion for 8.5 miles — that’s $2 billion per mile. Madrid is proposing to build an underground subway of 4.5 miles for less then $1 billion euro.
If building subways costed an order of magnitude less in this country, we’d get a lot more subways built, and likely a lot more political support to build and willingness to pay the taxes to build.
But its also true of the big budget items on the Government budget.
The 3 items that dominate the government budget, defense, health care, and education — are the outcomes (say, US security, US population wide health, and a high skill workforce) achieved correspond to the inputs (money from taxes) that was put into them?
@bob sykes
The political pundits you read have absolutely no understanding of how international trade or currencies work. It is like an ER Doctor quoting political pundits who have absolutely no understanding of thermodynamics.
Trade is conducted between companies in the currencies of their choice. Dollars are the most popular because they are the most available. Currency is a commodity, and like any other commodity, you must pay for it.
Since the Chinese run a trade surplus, there is not much yuan available, and this will cause the fee to purchase yuan to increase. In the case of oil, the cost of a barrel of oil will increase, but the Saudi oil trader will not receive the increase.
Now the Saudi oil trader has yuan, but Saudi Arabia uses the riyal. Saudi oil producers want riyal for their oil. Now, he needs to convert some of his yuan into riyal to purchase oil to sell for yuan, and he needs to invest his profit.
Unlike the dollar, there are few places for the Saudi oil trader to invest the excess yuan, but since the yuan does not float, he can trade it into dollars. He will take a hit for the conversion, but there are plenty of dollar based securities.
This is the kindergarten version, but I do not fully understand it. Actually, there are multiple markets which operate in different ways.
What you and the political pundits you read do not understand is that “dollars” are not dollars. “Dollars” are actually eurodollars which are “dollars” on off-shore balance sheets, and they date back to the Marshall Plan or earlier.
By stealing other countries investments, the US is in the process of destroying dollar based securities as the best investments. This could lead to the slow degradation of the eurodollar, and over time, that degradation will increase. It will take far, far longer than you imagine, but the collapse will occur far, far quicker than most will imagine.
@Drew
Kinda related: A Most Dangerous Assumption: Mining the Future to Spend More Today
You might find the debt jubilee part interesting. If you think it is garbage, that works, as well. Have a good laugh, and take a spin in a Yellow Submarine.
There is another post you may find interesting. I cannot post the link without being sent to moderator’s jail, but it is at the same site. Go to the main page and scroll down a few posts to “Prepare for the Repricing of Risk Globally”.
Here, the reinsurance part is interesting. Also, a better name for financialization might be “easy monetization”. If you think it is garbage, have a good laugh, and with tectonic movement, you will eventually need to order a Yellow Submarine.
Anyway, I am not looking for a fight. Hopefully, you have not ruined your hearing blasting Zeppelin on your fancy speakers, but I get it.
Tasty – Here you go, buddy.
https://www.bing.com/videos/riverview/relatedvideo?q=ermet+artigan+concert+black+dog&mid=FD648AD0A1E0B92D08B3FD648AD0A1E0B92D08B3&FORM=VIRE
You know, I can listen to opera one night, Sinatra the next, Krall the next, Miles the next………and Zeppelin the next. I feel sorry for people who can’t appreciate multiple musical genres. Zep is, of course, pure energy.
@Drew
Same, but throw in Billie Holiday, Howling Wolf, Bo Diddley, Carl Perkins, the Sex Pistols, Green Day, Dr. Dre, and Snoop Dogg.
I used to put on Zeppelin II and start coding, and occasionally, I would loop Kashmir for an hour or two.
“The late 90’s was characterized by the boom in venture capital (private equity). Partly due to capital gains treatment. Partly the internet boom.”
Revenue as a percentage of GDP started increasing in 93. Cap gains cut was in 97.
“Citing a totally different period in the early 80’s is pure sophistry.”
A cap gains cut of the same amount in the 80s did not lead to an increase in revenue. Guess they only worked in the 90s.
“retarded, and kept a rebounding economy tepid.”
GDP growth was better than Reagan. Better than under any POTUS since LBJ. Averaged 4%. We also nibbled away at the debt while Reagan, and everyone else for that matter, added to the debt. Use added ton of jobs and significantly cut the poverty rate. Those are the numbers. You are making an argument based upon emotions and assumptions. We could use tepid again. To be clear, I think tax rates can have an effect but when you look at the actual numbers the effects must be small, outweighed by other factors. So I am pretty skeptical about using tax rates for their secondary effect. We should set tax rates in order to pay for the spending we want.
Steve
Dave Schuler: Another is that 17% is what Americans are willing to pay in federal taxes.
And Americans are unwilling to forego 20% worth of spending.
The fault, dear Brutus, is not in our stars,
But in ourselves
Brutus etc
Truer words were never spoken. But where is leadership, statesmanship, and the cold hard reality that there is no free lunch? Oppose more government at all costs. Make it do what everyone else does: economize. They never seem to fix any problems anyway. Politicians are running on the same grievance issues today as when I was 15. I suspect…..forever. But free beer is so, so seductive.
Steve – Blah, blah, blah.
Tasty – not sure I can stomach Green Day, but love the others.
@Drew
Try Green Day’s Shenanigans. I usually prefer earlier works, but I like Frank’s older voice.
I do not think I have added this: BABYMETAL – Ijime,Dame,Zettai – Live at Sonisphere 2014,UK (OFFICIAL) Scroll down the comments a bit for someone there who explains what happened. They are kinda dated now, but still, the youngsters will think you are a hipster.
alt-Dave: A Tax Problem?
alt-Dave: There are a couple of ways of looking at that. One is that the Congress has carefully crafted the federal spending laws for that percentage of GDP. Another is that 20% is what Americans believe is what they need in government programs
alt-Drew: Oppose more tax cuts at all costs.
alt-Drew: there is no free lunch . . . Make it do what everyone else does: pay for what you want.
Zachriel:
Here is the headline of the editorial I cited in the post:
I questioned that in my post’s title. Does that add the context you missed?
You wrote:
The implication of that is that Americans will not accept payments from the government that they don’t “need”. Prove it.
Just a side note i forgot to add. One of the reasons the graph looks bad is that it continues out to 2030, including spending that hasn’t happened. So we are comparing past real numbers to projections that assume current trends continue. That’s not what really happens.
Steve
Dave Schuler: I questioned that in my post’s title.
As you said, “17% is what Americans are willing to pay in federal taxes.” And as alt-Dave said, “20% is what Americans are unwilling to forego in spending.” It’s called framing.
Dave Schuler: The implication of that is that Americans will not accept payments from the government that they don’t “need”.
Not sure that is a properly framed statement. People will accept payments from the government whether they need them or not. And many people don’t receive payments from the government, but they support the programs that dole out the payments, whether for the military or for social programs.
More specifically, most Americans support Social Security and Medicare, which account for 9% of GDP (growing to 11% in the next decade due to Medicare costs). Just stop spending on Social Security and Medicare, but keep the payroll taxes. Problem solved (at the expense of new problems).
steve: We should set tax rates in order to pay for the spending we want.
That’s generally correct. Ongoing expenditures (i.e. living expenses) should be paid for. Investment, such as for infrastructure, can be borrowed as it leads to productivity gains. And there has to be room to handle emergencies, so a rainy-day fund should be set up during times of plenty with room for borrowing during downturns.
To break that down a bit (using 2022 as the base year):
Mandatory spending is 74% of the federal budget, primarily Social Security, Medicare, Medicaid, and interest on the debt. Discretionary spending is half defense, which most analysts believe is too low. Much of the other half of discretionary spending is considered necessary by most Americans, such as transportation and administration of justice. Science investment and veterans’ benefits also have strong support. Eliminating all federal education spending would save 0.3% of GDP, and such cuts would certainly have a negative impact. So, where are the cuts going to come from?
Failing that means taxes or debt.
@steve
Just a side note i forgot to add. …
I will not forget this, and you can expect me to reference it in the future. Please bookmark it, if your memory is faulty.
“Mandatory spending…”. LOL
As I’ve noted, Zach, all incompetent managers tell me they can’t control spending. We call those people “ex-managers”. But government doesn’t work that way. Hence, the problem with government.
You obviously don’t have a managerial bone in your body. You can’t differentiate the actual expense of delivering “needed” (snicker) services from the attendant inefficiencies of diverted funds and bloated staffs. I would posit that every dollar of legitimate government service provided “for a humane society” requires another 2 dollars of ancillary costs. That’s a horrible business model. It’s by design. Just imagine if you saved a buck. Heh. But that costs votes. No chance. Just no chance.
But as I’ve said, in the real world debt service eventually becomes reality. And then you deal with spending, or you don’t. You print money. That’s inflation.
You correctly identified, Zach, that people want the spending. Brilliant. Just brilliant. Free stuff. What an insight.
But you don’t deal with the real issue. The free beer crowd actually thinks, due to corrupt pols like Joe, that someone else is going to pay. That’s a comment on morals. The electorate is immoral. I want- you pay.
Good deal if you can get it. Not reality.
1) Drew, your crowd is the free beer expensive crowd. All your party does is cut taxes while leaving spending intact. I did run a corporation for along time and if you keep cutting revenue and not expenses we call that an ex-corporation.
2)” I would posit that every dollar of legitimate government service provided “for a humane society” requires another 2 dollars of ancillary costs.”
You are making up stuff. I am very familiar with spending in health care and for Medicare spending is more efficient than the private sector. Might be true for some of the large building projects or military acquisitions but would like to see it on paper.
Steve
@Drew
Get off your high horse. You are living on more free beer than most. Your free beer is derived from all the dollars borrowed into existence in the Modern Monetary System (MMS).
This does not justify the government spending or freebies, but if you are alive when it all comes crashing down, it ain’t gonna be pretty. I hope you still remember how to grow corn. Hopefully, I can still shoot straight.
This is just a suggestion – point @Zachriel towards relevant primary sources. He will probably use them against you, but hey, don’t you like a good argument?