Taxes and spending, charts

I found some pretty interesting pages on the internet about taxes and spending.

This chart shows the top marginal tax rates from 1916-2010.

And this web page has charts showing government receipts and spending as a percentage of GDP.

Now it has been pointed out that the income tax rate was 91% during the years 1951-1964, yet this was a period of excellent economic growth. This statement is deceptive, however, because during the same period the corporate tax and capital gains tax rates were lower than that. Still this period has higher tax rates we do today.

Rates don’t tell you the whole story, because how income gets calculated determines what this rate is applied to. During the 1951-1964 period, there were a whole bunch of ways to reduce your income and to get what was left reclassified as capital gains instead of ordinary income. You might call these loopholes. The chart of tax revenues collected shows that revenues were between 15% and 20% of GDP during that time period. People were most certainly not paying 90% of their true economic income in taxes.

On the other hand, these charts do show that tax revenue collected as percent of GDP peaked in the 1990s at around 20%, and that was a time of good economic growth. The Bush tax cuts led to less revenue but didn’t do too much for the economy. Now, I do think that part of this is explained by luck: Clinton was president during a good part of the business cycle, and Bush the tax cutter was president during a bad part of the business cycle, and that tax rates didn’t have much impact either way.

During the last three years, we see that government spending has skyrocketed while tax revenues have plummeted. But this huge budget deficit hasn’t stimulated us out of a bad unemployment situation. It is my belief that our employment problems are structural (immigration, automation, and outsourcing of jobs to low-wage countries) and we are not going to make things better by continuing to run with such a massive budget deficit.

Because government aims to do a lot more today than it did in the 1950s, it seems appropriate that the country needs to shoot for government revenue being 20% of GDP rather than 15%. In other words, a budget compromise needs to include tax increases as well as spending cuts. And I would strongly recommend that tax increase come from closing loopholes rather than by increasing marginal rates on ordinary income.

Comments

[outlaw josey wales]

You need to look at the constituencies of the loop holes and the ordinary income tax. The loop holes were provisions specifically lobbied for by organized and well funded interests of various kinds. They will be able to exert maximal pressure to prevent anything significant from happening.

On the other hand, the general population is not and cannot be similarly organized in the absence of great outrage, although you would think the Wall Street shenanigans would have done it. But they haven't.

Someone also needs to come up with a better term for "tax expenditures." Those need to come down as well.

[davver]

"Because government aims to do a lot more today than it did in the 1950s, it seems appropriate that the country needs to shoot for government revenue being 20% of GDP rather than 15%."

The latter part of the statement is true only if you agree with the former.

I agree with your statement about tax rates not mattering over time. Although the headline marginal rate has moved around a lot revenue is a constant 15%-20% of GDP, I doubt the highs and lows of that 5% are enough to matter that much to the economy.

The trend since the 50s has been a slight shift in the tax burden from capital to the middle class, the biggest example being the snow job with the SS "trust fund" coupled with capital gains tax reductions.

"And I would strongly recommend that tax increase come from closing loopholes rather than by increasing marginal rates on ordinary income."

Agreed.

[E]

HS
"Because government aims to do a lot more today than it did in the 1950s, it seems appropriate that the country needs to shoot for government revenue being 20% of GDP rather than 15%."

Why not just sit here, do nothing, and let the market "fix" it. Since Americans obviously do not have the willpower to keep their financial house in order, the market will step in and force it upon them, just like what happened to Greece.

[mikeca]

"Why not just sit here, do nothing, and let the market "fix" it. Since Americans obviously do not have the willpower to keep their financial house in order, the market will step in and force it upon them, just like what happened to Greece."

What is happening to Greece now cannot happen to the USA. The USA has its own currency. If the market loose faith that the USA will be able to pay back all its debt, people will start pulling money out of US markets, the dollar will go down in value, and prices will start going up rapidly (since everything is imported now). This will set off widespread inflation which will quickly reduce the debt back down to a reasonable percentage of the inflation grown GDP. The debt will simply be paid back with dollars that are not worth as much.

Greece cannot do this because it does not have its own currently. It is part of the Euro zone and its debt is in Euros. Because of the strength of the economy in Germany and other bigger European countries, the Euro is a strong currency. Greece cannot simply inflate its debt away, but the USA could.

[davver]

mikeca,

So my savings will be worthless and I won't be able to afford gas or food.

Sounds great.

[E]

Posted by: mikeca
What you just described would mean the end of the US dollar as the world reserve currency. Once that happens, countries that loan money to the USA would demand the debt be paid back in their own currency, not in US dollars. Basically that means the USA couldn't just run the printing press to pay off its foreign debts. The USA will collapse into a 2nd world nation.

Like I said before *let the market "fix" it.*
Notice the quotations marks on the word "fix"....it's implied that there is a double meaning here.
There can only be one outcome, an unhappy one for the majority.

[gaiaguy]

Close the loopholes. Great idea. And at the same time why not fix Medicare and Medicaid funding problems by eliminating "waste" and "fraud".

[mikeca]

I am not suggesting that inflating away the US debt is a good idea or a desirable thing. There would be many consequences, some of which other commenters have suggested. One other outcome would be that imported goods/services would be far more expensive relative to domestic goods/services. This would favor domestic manufacturing and job growth in this country. Still, this would wipe out the value of American assets and make the USA a much less wealthy country than it is now. This is not a desirable outcome.

The Greek situation is a complete mess. Greece clearly will never be able to pay off all its debt. Everyone knows this, so nobody will lend Greece money anymore, except for the European Central Bank (ECB) and the IMF (lenders of last resort). This is politically unpopular in Germany and rest of Europe, because everyone knows those "loans" will never be paid back, but the rest of Europe is caught in a trap and has little choice. If they stop lending (giving) money to Greece, then Greece will default on its debt and pull out of the Eurozone going back to its own currency. This will cause a period of severe economic hardship in Greece (nobody will loan them money in their own currency either), but it will make Greek exports very completive and make Greece a very cheap tourist destination. Eventually this will boost the economy and things will start to improve.

This would be the solution Europe would favor, except for the fact that many big European banks hold large amounts of Greek debt or have insured Greek debt. Many of these banks will fail, and have to be bailed out by their governments. Countries like Spain and Italy have rather large debt problems already (not as bad as Greece yet), but if Spain and Italy try to borrow enough money to recapitalizes their banks then they will probably be in the same situation as Greece is now. The cascading effect of the bank failures could lead to the collapse of the Eurozone and a Europe wide depression.

For the moment Europe seems to be trying to muddle through. The ECB and IMF keep loaning (giving) Greece just enough money to prevent it from defaulting and pulling out of the Eurozone, but they hate themselves for doing it. It is politically very unpopular, but the collapse of the Eurozone and another depression would be even more politically unpopular.

[Mark]

The problems we have do seem to be structural in nature. It seems to me that we are faced with a tradeoff. If we have high inflation, the weakening dollar will make American goods more attractive on the world market and increase employment here but at the same time increase prices of imported goods for the American consumer. If we have low inflation and a strong dollar, we'll just keep hemorrhaging jobs overseas. We'll have low prices on imported goods but won't be able to buy them because we'll be unemployed and won't have any money. To deal with Chinese and Japanese currency manipulation, we may have to inflate and accept higher prices before our industrial base becomes completely hollowed out. We can't all go to work for the government because tax revenues need to come from somewhere.

[E]

Posted by: davver
"So my savings will be worthless and I won't be able to afford gas or food."

It is often said inflation punishes savers. However Americans are by and large debtors NOT savers. This is why that warning often falls on deaf ears. Debtors like inflation because it makes their debts cheaper to pay off and since this is a democracy based on majority rule we all know what's going to happen right? The printing press will continue running until it can't.

The debtors will keep taking on more debt until they can't find a creditor who is dumb enough or stupid enough to loan them anymore money. It's like a credit card junkie who stops taking on more debt not because he became responsible but because he got black listed. That's what happened to Greece and I expect to see the USA share the same fate.

[Nah]

"Once that happens, countries that loan money to the USA would demand the debt be paid back in their own currency, not in US dollars."

They can demand all they want. How will they enforce their demands?