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Too Little Taxation, Or Too Much Spending ?

By Da King Published: March 11, 2012

In general, if you ask Republicans, they say the government spends too much. If you ask Democrats, they say the government taxes too little. Conservatives talk about cutting spending. Liberals talk about raising taxes. There are, of course, variations to this generalization, but I'm not going to get into that today. I want to focus on the bigger picture.

Who is correct in this debate ? Let's look at some numbers.

The White House Office Of Management And Budget publishes historical data to help us figure it out. Today, I'm going to look specifically at Table 1.2 - Summary of Receipts, Outlays, and Surpluses Or Deficits As Percentages Of GDP (1930-2017).

From this data, we find that in 2011, federal receipts (taxes) came to 15.4% of GDP, and federal outlays (spending) came to 24.1%.

From a historical perspective, the 15.4% receipts figure is far below normal, and the 24.1% spending figure is far above normal (thus the trillion+ dollar Obama era deficits). The last time federal receipts were lower than 15.4% (except for 2009 and 2010) was 1950, when receipts were 14.4%. The last time federal spending exceeded 24.1% (except for 2009 and 2010) was 1945, when we were pumping nearly half our economy in World War II.

This seems to show that both Republicans and Democrats are correct. Federal spending IS too high, and federal taxation IS too low.

But there are other factors to consider. If we look back a few years to before the recession hit, we find that in 2007, federal revenue was 18.5% of GDP, and federal spending was 19.7%. That still adds up to a deficit, but nothing compared to what we have these days. That 2007 Bush era deficit was $160 billion, as opposed to 2011's $1.293 trillion deficit. Quit a difference. In addition, the 18.5% revenue number and the 19.7% spending number from 2007 are much more in line with post-WWII historical averages for the federal government than today's out-of-kilter numbers.

Why was federal revenue so much higher in 2007 than in 2011 ? The Bush tax cuts were in effect for both years, so it's not that. Obama instituted a temporary payroll tax cut that had a minor effect, but the major effect is found in the area of employment. In 2007, the unemployment rate averaged about 4.6%. In 2011, the unemployment rate averaged around 9.0% (supporting link). When a lot fewer people are working, a lot fewer people are paying taxes, and federal revenue drops accordingly.

Thus, if we want to push federal revenue back up to it's historical normal range (about 18-19%), the main way to accomplish it is to decrease unemployment. Raising taxes during a period of high unemployment and lower demand would actually inhibit consumer spending, retard economic growth, and make it more difficult to lower the unemployment rate. Even Obama knows this much, which is why he has delayed his tax increases. That's why he agreed tp extend the Bush tax cuts for a couple years, why he extended the payroll tax cuts, and why ObamaCare taxes haven't gone into effect yet. Obama won't admit it, but his actions show that he knows the Republican credo on tax cuts is correct - tax cuts stimulate the economy. Obama attempts to carve out an exception to this rule for the rich, and in some cases he's not wrong, but in other cases, the people Obama defines as rich are in reality the same people who create jobs in America.

Now let's turn to spending. Spending is the highest since WWII, and this will remain true even after all the effects of Obama's stimulus measures have ended (which they mostly have already). Federal spending in 2012 is estimated to be 24.3% of GDP. That's higher than 2011. Then add in the baby boomers retiring en masse and adding to our entitlement costs. Then add in the ObamaCare costs. Something has got to give. Either we have to institute massive tax increases across the board (not just on the rich), or we have to lower these costs and define down our expectations from government. Nibbling at the edges, as we've done to date, is not going to be anywhere near sufficient.

It seems quite clear to me that government spending is the problem. Not only is federal spending way above normal, but if you add in government spending at all levels, it is consuming nearly HALF of our entire GDP (44.27%).

I suppose it is possible to grow our way out of the problem, but that would take one heck of a growth spurt. If growth is to be part of the answer, then I'm back to agreeing with the Republicans again. Eliminating hurdles to job creation, as the Republicans are proposing via lower business taxes, fewer regulatory hurdles, etc., makes sense to me. Punishing the business sector, as I hear liberals proposing via higher taxes, ever more regulation, and ever more big government control, makes no sense to me whatsoever. In fact, when I hear liberals talk about the private business sector, it's as if they are talking about the enemy. That makes them dangerous people in my eyes. Our private business sector is the source of ALL our wealth and ALL our jobs. ALL government funding ultimately comes from the private business sector. It is our very economic lifeblood. Demonizing and punishing it is counterproductive. Liberals seem to believe everything is bestowed on us from the government. That is an erroneous belief. The other day I heard liberal economist Paul Krugman advocate the creation of 1.3 million more government jobs to jumpstart our economy, but all this illustrates is that Krugman doesn't get it. More government jobs means MORE GOVERNMENT SPENDING, which is already too high, and which actually drains our economic wealth away via higher taxes. What we need is more PRIVATE SECTOR JOBS. That is where our organic wealth really comes from, not the government.

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