Dispatches from the Creation Wars

Part 1 reviewed our slowly declining economic growth rate while Part 2 revealed the long-term stability of federal tax receipts coupled to a recent decline to the point we’re paying less in federal taxes relative to the size of the economy than we have in sixty years, in spite of the creation of Medicare. We also observed no correlation between receipts and GDP growth within the narrow band of receipts relative to GDP.

Given our ever-increasing concern about the rise of our federal debt relative to the size of the economy that must pay interest on this debt, it seems that increasing federal tax receipts is a no-brainer “yes” where that is a popular argument on the left given higher effective tax rate burdens in the past didn’t appear to hinder growth in business up-cycles, i.e., the later Reagan years and the Clinton years . However I think one more item is important to understand to properly frame this argument and that’s the total tax burden. So I’ve added that data to our graph.

US Fed & St-Local taxes relative to GDP.jpg

I used a 2-order polynomial trendline for the total tax rate and publish R2. The median/average for 1950 – 1980 was 30% and 31% respectively while the values for 1980 – 2010 were 35% and 36% respectively, a 16% increase in taxes on the economy in the past thirty years relative to the prior period. And just like federal receipts, I found no correlation between total tax receipts as a percentage of GDP relative to GDP growth rates.

I’d like to point out again this increased tax burden doesn’t necessarily mean people’s discretionary income available for consumption went down accordingly since they could very well be securing far more services from the government which are now funded by taxes than the volume previously procured in the private market, e.g., healthcare, higher education.

Given these results I find it interesting that so much of our divisive debates revolve around federal taxation rates which are stable or declining while state and local taxes have risen significantly over this same period of time, though stabilizing. And while I’m sure there’s many a heated debate about taxes in certain states, do we always encounter the same passion, divisiveness, and rhetorical fallacies in those debates we experience regarding federal taxes?

Another observation I’ve made living in red-state areas though also living in moderate or liberal enclaves as well is that the policy debates I’ve encountered locally are normally rational debates and not nearly as partisan or idiotic except when discussing business ventures that impact the environment which brings out the idiocy on both sides. In fact our property taxes frequently pay for services that both require tax increases and were conservative-led initiatives.

I’m inclined to consider increases in federal taxes. I think we need to appreciate such increases within light of total taxes including taxes at the state and local level, i.e., part of budgetary reform may very well include spending cuts and resulting services which some states decide to pick-up. For example, California’s investment in stem cell research. Making a more rational budget might also require pushing some spending and attendant services onto to the states in order to free up federal receipts for more strategically necessary spending and investment initiatives where we see some states prudently pick up some of the services cut while others do not and suffer accordingly.

I also think we need to consider healthcare reform’s impact on receipts. All other factors remaining static we should see an increase in tax receipts for healthcare in order to accommodate subsidies to increase the number of individuals covered. That initiative by default doesn’t obligate us to cut spending elsewhere since the cost of some of these services are merely being transferred from within the private sector to the government, with the exception of added healthcare consumption related to increased coverage. However, I also think the old adage taught to us in our first economics courses, ‘guns or butter’, remains sound given our onerous debt levels and our rising entitlement liabilities. So I would hope increases in government expenditures are paid-for where we drop some of the guns to keep our tax receipts for non-entitlement spending at modest-enough levels which don’t risk growth rates or our ability to increase taxes to properly fund entitlements.

Federal Receipts: Office of Management and Budget Historical Table 1.1. found at this link: http://www.whitehouse.gov/omb/budget/Historicals/

State & Local Receipts totals from www.usgovernmentrevenue.com who sources the raw data from the U.S. Census Bureau: http://www.census.gov/govs/estimate/

GDP from Christopher Chantrill’s “U.S. Government Revenue” site. That site is getting its data from: “GPO Access” which is the Government Printing Office.