U.S. Government: Not Enough Revenue
Those on the other side of the divide don’t necessarily argue that spending needs to be reduced. Instead, they believe that a slower growth rate of spending, in combination with tax increases, is the preferred way to manage the economy.
They claim that extreme cuts such as those proposed in Paul Ryan’s budget will sink the U.S. economy into another deep recession, just as similar austerity measures have done throughout Europe. They also dismiss the notion that the budget must be balanced, arguing that the comparison between the federal government and the family budget is a logical fallacy.
Taxes as a Percent of GDP
Taxes as a percentage of GDP have varied over the decades, generally hovering between 17-20% during the vast majority of the past 70 years. With the passage of the Bush tax cuts in 2001 and 2003, the 18.4%-19.9% percentages seen when the federal budget was in surplus during the Clinton years fell steadily, dropping to a low of 16.1% in 2004. They rose again during the peak of the housing boom, but with the economic crash, the bottom fell out of tax collections. Revenues declined to a mere 15.1% of GDP in recent years.
The difference between 15% and an average of 18% for an economy the size of the U.S. is substantial. If revenues were to return to more than 18%, over $300 billion in additional income per year would be collected, or approximately 30% of the most recent annual budget deficit. Thus, the ‘balanced approach’ proponents believe that increasing taxes through closing loopholes and additional revenues on top income earners in combination with measured spending cuts is the best way to both reduce the deficit and grow the economy. Furthermore, with a continually-growing economy, in theory, the nation would generate even more tax revenues, causing the deficit to continue to shrink further still.
Budget: The Right Approach
What is the right approach? That, of course, is the 16 trillion dollar question. Philosophically, Americans believe in balance; therefore, President Obama’s calls for a ‘balanced approach’ play well with the electorate. On the other hand, nobody wants their own taxes increased, so when asked which approach is preferable, a large percentage will choose spending cuts over new taxes. Albert Einstein once said, “the hardest thing to understand in the world is the income tax.” The second-hardest may be the Theory of Relativity, but how the politicians will solve our budget woes has to be up there somewhere.
Tax Policy Center. Historical Source of Revenue as Share of GDP. (2013). Accessed on April 24, 2013.
Rasmussen. 45% Think Deficit Should Be Reduced By Spending Cuts Alone. (2013). Accessed on April 24, 2013.
Blodget, Henry. Sorry, Folks, We Don’t Just Have ‘A Spending Problem.’ (2012). Business Insider. Accessed on April 24, 2013.
Brainy Quote. Tax Quotes. (2012). Accessed on April 24, 2013.
Brainy Quote. Margaret Thatcher Quotes. (2013). Accessed on April 24, 2013.