U.S. receipts and expenditures

A recent op-ed by Sen. Bernie Sanders of Vermont in the Wall Street Journal (Why Americans Are So Angry: Republicans want the entire burden of deficit reduction to be carried by the elderly, the sick, children and working families), besides holding faulty reasoning in every paragraph, hold a few factual errors that deserve discussion.

Raise tax rates to raise revenue

For example, Sanders writes regarding the rich: “Their effective tax rate, in recent years, has been reduced to the lowest in modern history.” He’s arguing for tax increases on the rich as a way of balancing the budget. (Really, he just wants more money to spend. He’s not serious about closing the deficit.)

There are many like Sanders and President Barack Obama who call for raising taxes, especially on the rich, as a way to generate more revenue and balance the budget. But try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

So tax rates may be low, or they may be high, but tax revenue, as a percent of GDP, remains nearly constant.

Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

Tax revenue is down

Sanders also wrote “The sum of all the revenue collected by the Treasury today totals just 14.8% of our gross domestic product, the lowest in about 50 years.” Sanders is incorrect here. In 2010 receipts to the federal government as a percent of GDP was 16.73 percent, according to the Bureau of Economic Analysis. For the first quarter of 2011, the figure is 16.97 percent. These numbers are much higher than what Sanders claims. He didn’t mention where he got his figures.

From 1960 to 2010 — the 50 year period Sanders mentions — the average revenue collected was 18.32 percent of GDP. The current figure is lower than that, so Sanders is correct that current revenue collections are lower than recent history, and that may be what has Sanders worried.

A look back at the history of federal receipts and expenditures is useful. A chart is below.

While President Ronald Reagan was able to cut tax rates, he couldn’t control spending as easily, and that led to large deficits. As a percent of the economy, spending rose during his term, although by the time he left office it was at the same level of GDP as when he took office. The message of Reagan’s presidency is that it’s easier to cut taxes than to cut spending. But we must always be in favor of cutting taxes, and hope that politicians have the fortitude to cut spending to match.

It’s doctrinaire among liberals today to cite President Bill Clinton and his tax increase as the cause of the prosperity of the late 1990s and the accompanying budget surpluses for several years. But his tax increase was not the only thing going on in those years that contributed to a budget surplus. The peace dividend, as defense spending fell during his term, helped. Clinton had nothing to do with the end of Cold War; he was just lucky to be in place to benefit from its end.

If cutting spending relative to the size of the economy was Clinton’s goal — and I don’t think it really was — he was lucky to have a Republican Congress starting in 1995 to help him accomplish this goal. With a Democratically-controlled Congress, it’s unlikely that spending would have been restrained, and with that, no budget surplus. While many bemoan gridlock in Washington because nothing gets done, the gridlock of the Clinton years led to less spending — and that’s good.

We should also remember that in 1997 the capital gains tax rate fell from 28 percent to 20 percent. Capital gains taxes collected soared. That was a Republican initiative, and it contributed to increased tax revenue during the Clinton surplus years.

The Clinton years were good for controlling spending, starting in 1993 with spending at 22.56 percent of GDP, and exiting in 2000 with spending at 18.81 percent. As to the prosperity of the Clinton years, many seem to forget that much of it was based on a bubble that couldn’t be sustained — the dot-com bubble. While not as large as the housing bubble, it was prosperity that very suddenly evaporated.

Then President George W. Bush took office. In 2001 spending as a percent of GDP was 19.25 percent, and it rose slowly during his term, reaching 21.80 percent in 2008. Then it exploded to 24.75 percent in 2009 and slightly less in 2010. For the second quarter of 2011, the trend is upwards, as spending reached 25.50 percent of GDP.

From the end of World War II to the start of Reagan’s presidency, spending steadily rose, relative to the size of the economy. From Reagan to Clinton we did a good job reversing this trend. But starting with the second Bush, and rapidly accelerating with Obama, spending is rising off the chart. It will be difficult to reverse this trend, but we must. Even though tax revenue has declined, we must remember what Milton Friedman taught us: the true measure of the size of government is spending, as spending not paid for today is taxation put off to the future.

Federal receipts and expenditures as percentage of gross domestic productFederal receipts and expenditures as percentage of gross domestic product.

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