The Most Important Graph You Will Need For The Fiscal Cliff

 

What you are looking at is a graph that measures the percentage of GDP that both taxes paid by Americans and government spending compared to an average of tax revenues over the past 50 years or so.  
You’ll immediately notice two things: Spending as a percentage of GDP  has only declined under both Democratic presidents Clinton and Obama (altho Obama’s spending has spiked for the most part because of TARP and other stimulus programs, he does show a sharp drop in 2010-2012), and had tax revenues remained at Clintonian levels in the 2000s, we wouldn’t be facing a crisis of confidence at the present time. 
 
Those are facts, not rhetoric. Granted, the underlying variable to all these curves is the growth of GDP over time. You’ll notice that Clinton managed to keep the economy humming along even as tax revenues increased and spending was reduced during his eight years. 
 
 Likewise, for one shining year, President Obama managed to grow the economy fast enough that the increased spending put in place by the trainwreck his predecessor left him was absorbed and paid dividends.
 
 This graph alone justifies the expiration of the Bush tax cuts (I’d argue they should all be allowed to expire, but that’s just my opinion) AND for much more stimulus spending. The spending on infrastructure repair alone would pay for itself almost immediately (within two to three years). The spending on infrastructure improvements that actually benefit the economy (and not pork barrel projects like bridges to nowhere and airports that close three months later.)
 
 Of course, the problem with tax hikes is, well, you. I mean, who wants to pay more in taxes? If you live in a high tax state like New York or California, do you want to have to pay Federal taxes on those taxes? Is the policy of allowing home mortgage interest deductions good for the economy or bad for it? What about the money your boss might pay for health insurance for you? Should you be taxed on that? Is that now irrelevant since we have national health coverage? 
 
 And how much will truly be raised and will it be enough to give Republicans cover to say they didn’t raise a tax (rates) while giving Democrats something to crow about with raising a tax (revenue)?

 

4 comments to The Most Important Graph You Will Need For The Fiscal Cliff

  • The point you make here is valid enough. The myth of Republicans as the low spenders and Democrats as the “party of tax and spend” is just that, a myth.

    That being said, citing spending as a percent of GDP is largely a fiction perpetrated by deficit spending apologists to justify higher deficits. It is a meaningless number, similar to your personal credit card debt as a percentage of your employer’s income. Nonsense. The real relationship which should be examined is that between spending and revenue.

    There is some validity to the examination of what portion of GDP is consumed by taxes, but with the GDP structured as it is, that is not a particularly meaningful number because GDP does not actually measure income, it merely measures cash flow. And in any case, that comparison should be made of taxes compared to the GDP, not government spending.

    Finally, given that the chart shows taxes significantly exceeding spending, and doing so for several years, it undoubtedly includes Social Security income in the taxes category, because actual deficits only disappeared for one year, and excesses revenue was only 2% for that one year. Social Security income cannot be considered revenue because, while it adds to the asset side as income, it also adds to the liability side as a debt in the trust fund.

    • actor212

      I’m not sure I agree with your dismissal of spending versus GDP. After all, if we presume government spending can stimulate the economy, and the economy is the GDP, then we can measure economic activity as a derivative of government spending. It’s probably nothing more than a good thumbnail estimate, but still, it’s a likely leading economic indicator.

      Liekwise, tax revenues would be a lagging indicator, altho in my mind even les precise. So if we were to set a goal of, say, spending being 20% of GDP in any year and taxes being 19%, we’d run surpluses pretty often. Yes, it measures cash flow, but again, as a derivative of the economic output of America.

      I think. I admit to not having given this graph much thought beyond the presentation that NBC News made.

      • JustPlainDave

        Actually, one should be wary of comparing these two using the metric of GDP. There’s no particularly good reason to do so for the purposes of comparing government revenues and government expenditures – inflation adjusted cash would work quite nicely. The challenge with using GDP here is that the largest movements in each of these trendlines (since 2008) are due to the fact that the “currency” with which they’re measured (GDP) cratered. Very large components of the spending jump and tax drop are driven by the GDP fluctuation. It’s very difficult to see changes over time when the thing it’s being measured against fluctuates like this.

  • Oh, and I would agree with you entirely that all of the Bush tax cuts should be allowed to expire. The possible exception is that the 10% bracket that was created by that bill might be allowed to remain.

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