1) The deficit is down because of less spending and more revenues 2) themes in tax reform to worry about.

January 22nd, 2015 at 3:44 pm

The picture I’m about to show you is not a shocker if you follow this sort of thing but I made it for a presentation this AM and damnit, I’m gonna use it!

It shows federal gov’t spending and receipts since 2007, in dollars adjusted for both inflation and population growth. The deficit/GDP ratio’s in there as well.

Here’s what I DON’T see: out-of-control spending!  Federal spending rose going into the downturn, as it must, due to automatic stabilizers (UI, food stamps) and the Recovery Act. Then it quickly charted a path back to pre-recession levels. To be fair, I’m not sure if even Fox/Tea Party types rail at Obama as a big spender anymore but…there it is.

These reductions in outlays were partly due to the fading of temporary stimulus, and more recently the improving economy taking pressure of the stabilizers. But the largest factor was spending cuts through a variety of budget measures over the past few years, cuts slated to amount to over $3 trillion over the next decade when you factor in interest savings.

The result was a smaller deficit every year since 2009, despite the fact that the economy still needed fiscal support. So, no–we’re not Europe…but neither have we eschewed fiscal austerity.

On the revenues side, the recovery is predictably boosting tax receipts which are climbing back to their historical average of around 18% of GDP, which is where CBO expects them to stay over the next decade.

But two things.

First, there are two themes percolating in tax policy world. One is the desire for tax reform that both sides seem to broadly agree should be revenue neutral. A more recent theme–one I’ve supported–introduces progressive tax policies that close tax loopholes at the top of the scale and use those revenues to help boost earnings and opportunities for middle- and low-income households.

Second, we face a number of future fiscal challenges that the private sector will not, by design, meet. Here’s a list I put up at the presentation today:

  • Aging demographics
  • Climate
  • Poverty, inequality
  • Geopolitics
  • Infrastructure
  • Human capital
  • “Secular stagnation,” lower potential growth.

So, while one should appreciate the lack of anything alarming in the figure below, one might well join me in worrying that a) revenue neutrality is an insufficient goal, b) hitting the historical average in terms of revenues/GDP is likely to be inadequate to meet our future fiscal challenges, and c) with an election coming and all this talk of tax cutting heating up, there’s a danger of doing damage to even that historical average revenue figure.

Anyway, that’s what I see in the figure. What do you see?


Sources: Treas, NIPA

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3 comments in reply to "1) The deficit is down because of less spending and more revenues 2) themes in tax reform to worry about."

  1. Larry Signor says:

    I see two things: A validation of Keynesian economics and the Picketyness of our economy.

  2. Smith says:

    Correct me if I’m wrong, the thrust of Obama’s State of the Union concerning taxes was new taxes on the largest banks, and restoring capital gains taxes to Reagan levels. Aside from middle class tax cuts, it would also pay for free community college and child care tax credits, not revenue neutral.
    David Brooks made good points about the completion rate of community college, and someone should address those issues too. http://www.nytimes.com/2015/01/20/opinion/david-brooks-support-our-students.html I would supplement Obama’s plan to address those concerns, without scrapping Obama’s proposal as Brooks advocates.

    Of course I would argue all college, not just community college should be free, just as high school is free. But our tax dollars should not be wasted either. Current proposals to drop school loan eligibility where 20% of the students default are ridiculous. How can it be acceptable for a government program to actively ruin the financial lives of 1 in 5 people?

    Marginal income tax rates need to be raised to Eisenhower levels just to take away incentives for high salaries (80% of income above $1 million as per Pikkety). Same with corporate rates since corporate profits go disproportionately to the top 1%. It’s absurd to wonder why we have the current levels of income inequality when not just the incentives, but due to past confiscatory rates, the very actual after tax possibility to earn so much more money is so radically different. You don’t need a Ph.D. in economics to understand the concept. The Republicans get it, tax higher rates and people will not stop trying to earn more they always say. This is of course a good thing. Unfortunately rich Democrats who control the party mostly only advocate small changes in the right direction.

    • Smith says:

      Uhmm, the Republicans say the opposite, higher rates cause people to stop trying to earn more. Tripped up by double negative of ‘not stop’ rushing to publish with inadequate proof reading.