I had the pleasure of appearing on Relevant Radio last Friday to talk to Sheila Liaugminas on her show, “A Closer Look.” I discussed the idea of “intergenerational justice,” a term favored by evangelicals (Roman Catholics tend to talk about “intergenerational solidarity”), and how that concept relates to much of today’s discussion about the federal budget.

One thing you hear from many is that we need a “both/and” solution: we need to both cut spending and raise revenue in order to close the annual deficits. I’m not really convinced of this, in part because the federal government has historically shown that increased revenue always results in increased spending. The government spends what it takes in, with a little bit more to boot. There has to be something structural and meaningful to stop this from continuing to happen, especially since we can’t count on the political culture to do so itself. Whether that structural obstacle is a balanced budget amendment or some other kind of binding agreement, something like that has to be put in place.

I don’t think it’s fair on the other side, though, to say that closing some tax loopholes, making tax avoidance more difficult, and simplifying the tax code is tantamount to “raising taxes” either. So in that sense there might be a case for raising revenues in this limited sense if it gets the tax system focused on what it is supposed to do (raise revenues) rather than using it as a tool for rent-seeking, social engineering, and pandering to special interests.

What’s more important than the question of revenues vs. cuts, however, is recognizing that the size of the federal government has stayed about roughly constant when you look at it in terms of tax receipts relative to GDP. Anthony Davies does a nice job illustrating this. He points out that the government basically takes in amounts roughly equal to 18% of GDP (+/- 2%). So that’s essentially what the government needs to learn to live on. By contrast, we’re spending about 24% of GDP this year, and that number only goes higher as entitlement promises come due.

So how about this for a both/and solution: we cut spending to get within a couple of percentage points of 18% of GDP and we focus on tax policies that will grow GDP in a sustainable way in the longer term.

  • Jordan,

    What do you think of Davies list of possibilities as to why government consistently take in 18% of GDP?:

    “It could be the Laffer Curve, maybe people are good at shifting the
    sources of their income in response to tax-rate changes, maybe people
    expend more effort looking for loopholes as tax rates rise, or maybe
    Congress plays a shell game – raising tax rates while exempting more
    income from taxes.”

    Also, if actual revenue percentage doesn’t appear to change with tax rates why oppose increasing the rates? I mean if 18% of private sector capital is going to be siphoned off by the state regardless of tax rates why make this an issue?

    If Davies is right the budget crisis is more severe than a lot of people understand it to be and it also means that it can only really be solved by economic growth.

    • Dan, I’d love to say I have a better explanation than those offered by Davies, but I don’t. I’m inclined to think that what the government takes away with one hand it gives back with the other…just not to the same people. As I note, the complexity of the tax code is a related issue.

      Now it’s one thing to note the correlation (or lack thereof) between revenues and tax rates. It’s another to say that its simply an iron law of 18%. The latter is clearly not true. But it does seem to be a good rule of thumb.

      So if the government is just going to get 18%, I’d much prefer it be straightforward about it and stick to spending what it takes in, rather than raising rates, adding subsidies, tax credits, loopholes, penalties, and so on and make it so really complex. 

      I’ve also seen statistics that more and more people (perhaps approaching or beyond a majority?) pay nothing net in income taxes. So opposing tax increases then is simply a way of opposing the burden being increased on a smaller and smaller proportion of the population.

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