• Why CBO projects no revenue growth

    I’ve received several comments about the CBO revenue growth projection in the graph below from this prior post or a similar one from this other post.

    Why is federal revenue pegged just below 20% of GDP in the long-run? The answer is that the CBO believes this is the long-run maximum sustainable level of revenue, whether for economic or political reasons. That’s a very defensible position, considering this historical time series of tax revenue (from a prior post):

    This isn’t magic. The revenue comes from taxes. Americans have demonstrated an unwillingness to be taxed at rates that produce more than about 20% of GDP. A more realistic, long term average is about 17-18% from the graph above.

    So, what happens when we put a realistic revenue figure along side health care cost inflation and project ahead several decades? Massive debt. That’s what CBO is telling us will happen if we don’t make some major changes.

    Alternatively, we can just tax ourselves like we never have before. That’s CBO’s other solution. It produces balanced budgets, but it does not seem realistic.

    How do you think things will really turn out? Massive debt or taxation at a level never before experienced in this country (or not in the post-war period anyway)? Kinda seems like there needs to be a third way. Hmm, now what might that be?

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    • Tax rates have varied over time substantially more than tax revenues. There seems to be more than just “people don’t want to be taxed” going on in your tax revenues graph.

      Also, given just after WWII the highest tax rates were above 90%, I’d be interested to know what you mean by “we can just tax ourselves like we never have before”.

      • @Will Ambrosini – Though related through the income distribution, marginal tax rates and tax revenue per GDP are two totally different concepts. Surely it is clear I’m only talking about the later and have said nothing about the former. (Nor do I care to.) Surely the graph I posted showing tax revenue as a fraction of GDP hasn’t changed much in 70 years conveys some information. What do you make of it? Tell me, how do you think we’ll get the US citizenry to cough up, in aggregate, substantially more in taxes? Can we really deal with the health care cost problem this way? My answer is pretty clearly, “No.” I’d like to hear anyone argue otherwise.

    • Well, then we vigorously agree! I’m just adding to your point that even in eras of large top marginal tax rates revenues weren’t any larger. So a “soak the rich” policy won’t solve the problem.

    • On the other hand, the rich have never been richer. During the post-war era, the rich were manufacturing CEOs and lawyers making the 2010 equivalent of 100,000’s, maybe millions of dollars. Today, they are financiers making millions and billions. Soaking the rich won’t solve the problem, but moderately increasing marginal rates on the super-rich might at least help.

    • “So a “soak the rich” policy won’t solve the problem.”

      If only the rich would stop soaking us.

      That aside, if Social Security, Medicare and defense spending are off the table, you will have to increase taxes.

      Steve

    • Inequality is on the upward trend again after just kissing the 1929 level before the crash. 2008 was already the highest level of income inequality in the postwar era which is also the post Social Security era. Soon we will pass 2008’s level of inequality. The american public has no objections to taxing the rich, even if congress drags it’s feet. So this means that as a matter of politics, it is actually possible for the american people to get behind a level of taxation far in excess of 20% of GDP.

      If we had a 60% income tax on a bracket that only applied to the top 1%, and kept payroll taxes and other income taxes at their current levels, we’d already be far above that magical %20 amount. Given the level of populist resentment, such a plan wouldn’t exactly be political suicide.

      Alternatively, if we simply enforced paygo rules on the Bush tax cuts expiration by making it so the cuts for the poor were offset by hikes on the rich we would be above the 21% reached in 2000 since growing inequality has made it so that more then 21% of income was eligible for taxation in the pre-Bush tax cuts environment.

    • Not with income taxes. I think it possible that a VAT, which would be less obvious, could push us over 20% for a while. I also sometimes think that Waldman may be on the right track. Maybe if we went to a tax structure that was more equal, with larger subsidies for the poor, it might be more accepted.

      Steve

    • http://www.taxpolicycenter.org/briefing-book/background/numbers/international.cfm

      Our total taxes as percentage of GDP (state+local+federal) is at 27%. If we let that go up by 10% over 70 years, we’ll be right at where the OECD average is now in 2080. Given how slowly taxes rise, and how much breathing room we have by slightly changing health-care or defense policies, I don’t see how you see it as unrealistic.

      It’s not rocket science. The sectors that governments have traditionally covered in the last 100 years, education, defense, and health-care, are labor intensive. As economic productivity goes up, the opportunity cost of labor intensive services go up, So, you’d expect government spending as a percentage of GDP to go up.

      Honestly, every country in the developed world spends and taxes far more then us, and has the same level of prosperity or higher. Our current low level of social spending is basically a historical fluke caused by racial tension in the beginning of the century (It’s not a coincidence that opposition to income redistribution correlates very strongly to standard measures of racial resentment). As racial resentment fades (Or more accurately, old racist white people begin to die)*, there really isn’t any reason to think we wouldn’t regress to the OECD norm.

      *That point isn’t me being glib. It’s really rather well supported empirically under a variety of different specifications. It’s not like the South suddenly decided that they loved fiscal conservatism the moment the Democrats decided to pursue civil rights.

    • Note that this is federal tax revenue. How does this graph look when we add the revenue of all the other jurisdictions in the US? (It’s my impression that in most civilized countries the actual taxing power of decentralized jurisdictions is rather lower than in the US)