I put a few trend charts together today from the OMB budget history data. My conclusions:
The magnitude of the deficit is a recent, short term problem caused by the recession, 2 wars and the Bush tax cuts (nothing new there, of course). Those factors have driven tax receipts way down and spending way up at the same time.
Even without those factors, however, the fact that we have a deficit is a long term trend problem. For three generations, tax receipts have been clearly trending down and spending has been clearly trending up. This was bound to catch up with us someday, even without the Bush wars, taxes and recession. This long term trend deficit should be fixed.
The charts and more comments are below. Everything is "on budget" data only and therefore excludes social security receipts and outlays.
Budget Summary
Federal spending (as a percent of GDP) has been on an increasing trend since 1950. Spending peaked under Reagan, declined through the Reagan / Bush / Clinton years, grew again under Bush and spiked in the great recession. Current spending is 20% of GDP, and as the recession and wars end it should be managed down to the trend level of 17.5% - 18% of GDP. However, I think the long term trend increase is appropriate and will continue, for several reasons:
- We are getting older (and fatter).
- Medical advances add to the average life span but also add significantly to cost, with aggressive end of life care and more expensive treatment alternatives (including prescription drugs) for more diseases.
- We are in a more competitive global environment that calls for more investment.
- We have gradually built up expectations of things the government will provide, and need to maintain the things that we've built up. (think roads, interstates, airports, OSHA, EPA, FDA, FAA, DOT, NTSB, food safety, WIC, SNAP, unemployment benefits, pension guarantees and more.)
- The infrastructure systems are aging and deteriorating.
- Concentration of income at the top leaves the poor and middle class with progressively lower real income and greater reliance on federal programs.
- Unemployment is a long term problem and we will not see "full employment" anytime soon - again causing greater reliance on federal programs.
I cannot look at this top level summary and conclude anything other than the fact that we have a serious tax policy problem. Tax receipts are way too low and headed in the wrong direction. Spending surged with the wars and the recession and needs to come back closer to the long term trend. Assuming that it does so, I do not believe that spending is the primary long term budget problem. There's no question in my mind that the GOP plan for even more tax cuts, arbitrary spending limits and pushing costs off the federal budget to states and individuals is completely absurd and doesn't merit any serious discussion.
Meanwhile, taxes receipts (as a percent of GDP) have been on a 60 year declining trend. They went up significantly under Clinton and, of course, dropped precipitously under Bush, with the Bush tax cuts extended by Obama last year. A return of tax receipts to the long term trend, or even to the peak of the Clinton years, will not match the trend level of spending. The three choices are 1) ignore the deficit or 2) reverse the trend decline in tax receipts or 3) reverse the trend increase in spending. I don't think 1) or 3) will work - so I'm left with option 2), reverse the declining trend in tax receipts. Note - this is not just a "Bush tax cut" problem - the declining trend is a long term issue that spans three generations.
In general, taxes have stabilized or increased under Democrats (so we are the "tax & spend" party) and have declined under Republicans - making them the "borrow and spend" party. Personally, I think "tax and spend" is both more honest and more sustainable.
Tax receipts
I was actually surprised by this chart. It breaks tax receipts into 3 of the main components - personal income tax, corporate income tax and excise tax.
Personal income tax has been on a slightly increasing trend until 2000, when the Bush cuts kicked in. They were well above trend at the end of the Clinton years, and the Bush tax cuts look like they over-corrected and brought personal taxes below trend. Allowing the Bush cuts to expire as scheduled, either for everyone or (preferably) for incomes over $250,000 should bring this line back close to trend. Beyond that, it may make sense to have additional revenue neutral tax simplifications that eliminate deductions and credits and lower rates - if (and a very big if) the resulting effective tax rates get more progressive, rather than less.
The big revelation (for me, anyway) is the long term decline in corporate and excise taxes. I know corporate tax loopholes are ridiculous, but had no idea that rates have dropped over the last 60 years from 4+% of GDP to only 1% - a whopping 75% reduction in corporate taxes! Clearly, tax reform in this line is a must if we are to increase taxes and even think about a balanced budget.
Excise taxes follow the same trend and are another tax opportunity that needs to be captured.
Federal Outlays - changes from 2000 to 2010
Federal spending was at a low of 14.8% of GDP in 2000. It peaked in 2009, and in 2010 was still 20.0% of GDP. This chart shows the increase, as a percent of GDP, in the 5 major budget categories. (The changes don't quite add up to the total, since interest actually decreased as a percent of GDP from 2000 to 2010. The Fed has been good for something, anyway.) Spending increases include:
- Defense (2 wars) up 1.8 points
- Income security (recession) up 1.7 points
- Medicare up 1.1 points
- Other health expenses up 1.0 points
Defense spending should decline as soon as we really start disengaging in Iraq, Afghanistan and Libya. We need to make sure we really do disengage, and really do capture the spending opportunities.
Income security spending will trend down as we continue to recover from the recession - although I believe there is a long term unemployment problem that will keep spending elevated.
The increase in Medicare and health spending is a serious problem that needs to be addressed - but with cost control measures, not by privatization and shifting the burden from government to individuals. I don't really know how to do this - but we need to enlist medical economists in solving this problem, not uninformed legislators.
Putting it all together
The deficit in 2010 was 9.4% of GDP:
Outlays 20.0 %
Receipts 10.6 %
Deficit (9.4) %
Over time we might want to balance receipts and outlays (or we can debate the appropriate deficit level, if you prefer). Of course, this won't happen immediately - but a long term strategic goal might help frame the short term changes each year. Looking at the above charts, I would start with a goal to close a 9.5 % gap by:
- Decrease spending from 20.0% to 17.5 % (trend), with reductions coming mainly from defense and income security spending as permitted by the economic conditions. This also requires getting control of future medical cost increases.
- Increase personal taxes from 6.2% to 8.5%. I think this will require increases at least from the $100,000 income level and above. Real effective rates have to be progressive, with higher income levels taxed at progressively higher rates.
- Increase corporate taxes from 1.3% to 4.5%. I know this triples corporate taxes and we already have nominal corporate rates that are too high - but we've all read the news about corporations with record profits and cash reserves that pay no US taxes. It's time that corporations pay an appropriate amount for the privilege of operating in this country.
- Increase excise taxes from 0.5% to 2.0% of GDP - I don't have any specific targets for these increases.
The spending reduction to 17.5% of GDP is not a proposal for mindless cuts to things we need, nor is it a proposal for spending caps. It is a spending goal that will be enabled by three things - getting out of three wars, fixing the economy to reduce the need for income securitiy expenditures and learning to manage health care cost more effectively. When these happen, spending can and will come down.
These very long term goals would balance the budget at around 17.5% of GDP. The budget changes aren't quite the same mix that the President laid out. For comparison, the 2016 proposed budget shows outlays of 18.7% of GDP and receipts of 14.9% of GDP, for a deficit of (3.8)%. I think we need more tax increases than he proposed, and more (and different) reductions in spending. I also don't expect that all of this could be accomplished by 2016 - the President's budget goes in the right direction but doesn't get there in 5 years. OTOH, tax increases of this magnitude will be very traumatic, and are well outside the bounds of what anyone is currently proposing, I think.
If we start with the President's plan, or something close to it, we can certainly make some progress, and reevaluate the goals every few years. The important thing, though, is to set a long term vision and start a transition to get there - both on spending (through job growth and ending the wars) and on taxes.