November 26, 2014

Spending Too Much? Or Taxing Too Little? Or Both?

The conversation below includes a blog post by the Committee for Economic Development Senior Vice President Joseph Minarik followed by a comment by Concord Coalition Executive Director Robert Bixby. This was originally posted on The American Square at  http://theamericansquare.org/profiles/blog/show?id=6352797%3ABlogPost%3A19001&commentId=6352797%3AComment%3A19003&xg_source=activity

 

By Joseph Minarik: 

An oft-repeated maxim is that the United States is not under-taxed, but rather, Washington is spending too much.  To see if this is true, it might be worth taking a look at the numbers.

To the extent that this claim is analyzed, it is generally in reference to the historical average of spending as a percentage of the GDP.  So, for example, federal spending now – actually 23.8 percent of GDP in fiscal year 2010 – is higher than its post-World War II (1946-2010) average of 19.6 percent.  QED, to some.

But what about revenues? 

And is the entire post-War average a reasonable historical standard?  All of our post-World War II history could be misleading, because that would include the years in which we borrowed ourselves into the trouble we now face.  Instead, a more reasonable approach might be to look at the recent years when our finances were unquestionably in order: the balanced budgets of fiscal years 1998-2001.

Here is a brief summary of those years, looking at both spending and revenues as percentages of the GDP, compared with the last two years of large budget deficits:


Then, for purposes of analysis, let’s look at the range of receipts and outlays – both the lowest and the highest, in the balanced budget years and the last two years:


So in our balanced budget years, federal outlays ranged from a low of 18.2 to a high of 19.1 percent, whereas in the last two years outlays were 23.8 percent (in 2010) and 25.0 percent (in 2009) – clearly higher.

However, receipts in the last two years also differed from the balanced budget years.  When the budget was in balance, receipts ranged from a low of 19.5 percent to a high of 20.6 percent.  But in both of the last two years of high deficits, receipts were only 14.9 percent of GDP – much lower than when the budget was in surplus. 

So how far off from our best recent budget years were these last two years?  Here is how the numbers stack up:


By Robert Bixby:

Clearly, our budget has been substantially off from its most reasonable historical benchmark, but on both sides of the ledger.  Spending has been anywhere from 4.7 percent to 6.8 percent of GDP higher than in our best recent years.  But revenues have ranged from 4.6 percent to 5.7 percent of GDP lower – very nearly the same difference.

Some might question this comparison, on the ground that revenues in the last two years have been lower because of the weakness of the economy, and will recover.  But spending has been higher because of the weakness of the economy as well, and it will decline.  Revenues have been reduced because of stimulus initiatives.  But spending has been increased because of stimulus initiatives, too.

In sum, a simple historical view of recent federal government spending and revenues does not by itself indicate that our budget problem is caused 100 percent on the spending side of the ledger.  Revenues have been lower than history would endorse, just as spending has been higher.

But choices for our future should not be made solely on the basis of historical norms.  Any public finance textbook would say that every public initiative must justify itself according to the benefits it would yield relative to the cost to fund it.  Our elected decision makers owe us their careful analysis of the value of national security, food safety, the education of our next generation, and the health of our elders (among other things) against the economic cost of raising the funds necessary to accomplish those objectives.  (And that relative balance will change over time.)  Anything short of such careful analysis does not do justice to the trust of public office that we, the voters, have vested in our representatives in Washington.