Reviewing Federal Receipts

To Support Discussions on Taxation

In the last 40 years America has seen an increased discussion about reducing taxes. Here, we will review federal receipts during our lifetimes. This information may be used to determine whether the various arguments you hear are valid.

Last update: Arpil 2012

 

Introduction

Many pundits have claimed that the government has grown much faster than inflation. They overlook a few obvious problems. First, the population has grown rapidly also. The population both receives the benefits of government, and pays the bills. So, naturally one would expect federal receipts to rise with the population. So we really need to check inflation adjusted receipts per citizen.

 

The concern expressed by the pundits initially appears to be justified. Receipts per citizen have risen faster than inflation. However, during the same time our material wealth rose also. In 1961 only half of Americans had TVs, many didn't have cars, many lived without air conditioning. Most had smaller houses. Much of the increase in material has to be supported by taxes (e.g.: roads for the cars). And with more wealth we are more able to pay for government programs. What we should have done was compared federal receipts to the GDP.

 
Now we see quite a different story. Federal receipts as a percentage of GDP dropped under Reagan, the elder Bush, GWB, and Obama. Federal receipts relative to GDP are now at the lowest point they have been in our lifetimes! During the 1970s, federal receipts averaged 23.5% (shown in green) and never dropped below 22.2%. During the last three years of the Clinton administration federal receipts averaged about 22.3% about the same as the lowest point during the 1970s! So why was the budget balanced for those three years? Spending per GDP dropped during the entire Clinton administration.

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Data Sources

  But when George W. Bush took office receipts dropped again while spending rose. We can see in the graph that receipts dropped faster than spending rose. Thus, the deficit grew more as a result of decreased receipts (tax cuts) than increased spending. So how much of the deficit was the result of tax cuts (revenue reductions? We can estimate that by comparing actual receipts to receipts at a previous level.
When we compare receipts to the 22% under Clinton, we see that most of the deficit was caused by lost receipts (tax cuts). Lost receipts would account for roughly $4 trillion increased debt since 2001. We see that Bush era spending increases also contributed to the deficit - total added debt roughly $1 trillion.
Observations:
  • Federal receipts relative to GDP are at their lowest point since WWII. This tax cut has not stimulated the economy. The economy grew faster before the tax cuts.
  • Federal spending relative to GDP is nearly up to the Reagan level of 1982-1983. With multiple wars, the bank bail-out, and health care reform, spending is still not as high as the peak under Reagan.
  • Much of the spending increase of 2009-2010 was passed by Bush in 2008.
  • The currect deficit was caused primarily by tax cuts.

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