Federal Debt and Tax Receipts

I published this chart the first time last February in the earlier version of LaMarotte. I thought it should be shown again on this platform in the context of the current debate about the debt ceiling and whether tax increases should or should not be a part of the discussion surrounding debt levels.

The chief point here is the relatively flat performance of Federal tax receipts since 1944. That flat performance suggests that taxes are not the problem—but the contrast between spending and taxes might be. The blue line, showing debt, tells ... the rest of the story

In addition to the trends, I’ve added some indicators to show when tax receipts hit low points since the Eisenhower years. These came in 1959 under Eisenhower, in 2004 under GW Bush, and under Obama at present.

What this graph shows through the harsh lens of national statistics is the weakening character of our political establishment. World War II produced a very sharp upward climb in tax receipts intended to fund that conflict. In 1934 (not shown) tax revenues were 4.8 percent of GDP. By 1944 they had reached 20.9 percent, never topped since. This 16 point increase in revenues managed to bring the debt down after the war was over. Pause for a deep breath. But then, beginning in 1981, the national debt began a slow but relentless upward climb. It went from 32.5 percent that year to 93.2 percent of GDP by 2010. This 61 point ascent of debt was not, repeat NOT matched by any upward motion of tax receipts. (The source of this graphic is the Office of Management and Budget (here), Tables 2.3 and 7.1.)

My conclusion in February was—and it hasn’t change since—that the nerve of the American political elite has simply failed! It didn’t have the intestinal fortitude to match expenditures by taxation. It asked us to read its lips rather than to feel its guts and biceps. That same failure of nerve—or insight, or responsibility, or will—is manifest now in attempting to solve the debt problem entirely by program cuts without any additional revenues.

Two CBO Projections



Hat tip here goes to Monique Magee (Marketsize). She alerted me to a Clusterstock or Chart of the Day. That led me to this Congressional Budget Office report, titled “CBO’s 2011 Long-Term Budget Outlook.” I have reproduced, above, the crucial chart. It shows public debt expressed as a percent of Gross Domestic Product, historically and then extended into the future based on two scenarios. The first of these is called the Baseline, the other CBO calls the Alternative.

The Baseline assumes that laws currently in effect will continue to hold force, as written. The Alternative, which CBO views as the more likely, assumes changes to current law. Baseline results in debt rising from 69 percent of GDP (CBO’s estimate) to 84 percent by 2035—which is, when you think about it, pretty grim! The Alternative results in public debt very near to 190 percent of GDP by 2035—which would be an ultimate record.

What struck me as most striking about this projection is that the grim but lower case assumes virtually no changes in law. As a consequence revenues would increase because the Bush tax cuts would expire and the alternative minimum tax provisions on the books would, as written, bring in increasing revenues. “At the same time,” quoting the CBO now, “under this scenario, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.” In other words we would allow taxes to rise and the health program on the books now to unfold as written, no new programs would be created, and the old programs would retain their funding at current levels. And that produces an 84 percent of GDP debt by 2035.

In the Alternative scenario, Congress will extend the Bush tax once again and take the bite out of the alternative minimum tax provisions. Minimum payments to physicians under Medicare—which would decline by a third under current law—would be permitted to remain at current levels. Further, shifting the burden for health care to the states, which is part of current law, will not take place as planned.

Now if you react as I did to the study of CBOs two cases, you might say, with Shakespeare—a plague on both your houses! The “good” case produces a ridiculously high rate of public debt. And the provisions that largely support it (letting tax cuts lapse, shifting burden to the states, and shorting doctors of their pay) are about as attractive as a sand-and-seaweed sandwich on the beach.

Revealingly, CBO lacks a third case, one that might actually produce really good results. It would have three legs. One would be increases in income taxes to the level of the early 1960s; two would be a Federal health care system applied with hard rules (cost control) and administered centrally rather than by insurance companies; and the third leg of this stool I’d gladly leave undefined. Any legislature with the guts and foresight to enact the first two could be trusted to get the rest of it right!

You wonder about the tax rates in the early 1960s? Check out this post on the old LaMarotte. Isn’t the current debt more like 98 percent of GDP? Well, I thought so too. But that number was for 2010. CBO, perhaps, has a sharper pen—and they’re projecting 2011 results.

Debt and Taxes

Let’s keep it simple. Where the national debt’s concerned, debt and taxes are intrinsically linked.I found a revealing data set on Wikipedia here. Wikipedia derived the data I show in part from the Congressional Budget Office, in part from a White House FY 2011 Budget tabulation. What I’m showing is the percentage change in national debt between the beginning and the end of each presidential administration. I’ve augmented the data by filling out the chart so that it reflects results for the Obama Administration up to the present time. Herewith is the graphic.

Except for a tiny increase in debt in the Second Nixon/Ford Administration, all administration until Reagan produced decreases in national debt. The red bars start thereafter, Reagan kicking things off. The sole deviation from that pattern came with the two Clinton administrations—where the debt once more dropped.

Red is the Republican, Blue the Democratic color signature. Forgive me for choosing these colors to show the results. Red shows increases in debt, blue decreases. And since Reagan they match the parties. To be sure, three different Republican administrations managed to cut the debt—and to identify them I put a little red in the blue. Seven Democrat administrations managed to cut the debt, Obama’s has not—and therefore I put a little blue in Obama’s red bar.

Quite consciously and deliberately, the Reagan administration let debt accumulate thinking that as it climbed, it would ultimately force cuts and a shrinkage of government. The administration miscalculated. Both parties have powerful urges to reward their respective constituencies. Democrats must spend on social programs to do so; Republicans can only do so by cutting taxes. But Republicans are also motivated to spend—at least on the military-industrial complex; and this urge is also basic and understandable. But the standoff that has developed is beginning to look irresolvable by courteous compromise. Troubling.

Where I come out is that Republicans should not try to hand money to their wealthy constituents by tax cuts—who don’t really need the help. I for one have always delighted in paying taxes—and the more the better. It meant that I was doing better. Then, by compromising on taxation, Republicans can ensure adequate spending on the military.

Real leadership for this sort of compromise must come from the right. The ordinary people must have jobs, healthcare, and schooling—and for this we can’t rely on that bloody Hidden Hand. Where are the genuine aristocrats among Republicans? Traditionalists who understand that nobility obligates—whatever name we call it: virtue, talent, power, wealth. If we all start acting like proles, Katie bar the door.