Today we will kill a fourth myth. Today's myth is the untruth coming from the political class that taxes must be raised in order to tame our deficit problem, i.e. the government has not collected enough taxes and that is what is causing the deficit to balloon. Of course, since this is a myth, nothing could be further from the truth. The basis of the analysis today is a great article at the Heritage Foundation website written by Brian M. Riedl entitled, "The Three Biggest Myths About Tax Cuts and The Budget Deficit." We have already touched on the first two myths analyzed by Mr. Riedl, namely that the Bush tax cuts caused the deficits we are seeing today. However, it is the third myth we are covering today, a myth that he frames as: "Declining revenues are driving future deficits." In other words, in his opinion, it is a myth that the deficits are caused by the government not collecting enough taxes.
To prove this point, Mr. Riedl does a simple analysis where he takes three economic data series from 1960 to 2020 (estimated) and divides two of the series by the third to create two ratio series. The denominator is the country's annual GDP and the two numerator series are the amount of money that the government spent every year and the amount of money that the government collected in taxes and fees every year. From 1960 to 2009, the ratio of government spending to GDP averaged 20.3% and the ratio of government revenues to GDP was 18.0%.
The spending to GDP ratio was generally under the long term average from the 1960s to the late 1970s and from about 1985 until about 2007 and above the long term average from about 1980 to about 1984. The key point to remember is that for most of the Bush administration, the long term spending to GDP ratio was below the long term average. The revenue to GDP ratio bounced around the average of 18.0% throughout the entire period. It is expected to stay around the long term average through the year 2020.
While the revenue ratio stayed around the long term average through the past ten years or so, the spending to GDP ratio has skyrocketed since Obama took office, rising to around 25% in 2009, 2010 and 2011 (estimated) before expecting to decline to about 23% and then constantly rising until it hits an astronomical 26.5% in 2020. Thus, according to this simple ratio analysis, it is the large run up in spending, relative to the GDP of the nation, that is causing the deficits, not the fact that the government does not collect enough in taxes. That ratio has remained relatively stable for the past fifty years.
Mr. Riedl does on further analysis, determining that government spending for just Social Security, Medicare, Medicaid, and interest on our national debt will jump from about $1.6 TRILLION a year to an annual average of $3.5 TRILLION a year. Since the Federal government is currently collecting about $2.1 TRILLION in 2010 to fund the entire Federal budget, tax collections would have to increase 66% just to cover these four budget items in the next decade. Other government costs such as defense, student loans, Federal employee salaries, etc. would also have to be paid for with additional taxes.
Consider another example. Since the current Federal budget is about $3.5 TRILLION, if we keep all other expenses flat and added in the extra $1.9 TRILLION a year from the increase costs of these four line items, the total annual Federal budget would become $5.4 TRILLION. In order to keep this level of expense at the long term average of 20.3%, the U.S. economy would have to grow from its current size of about $14 TRILLION to over $26 TRILLION within a few years. This is not going to happen.
Thus, myth disproved. It is not insufficient tax collection driving the deficit, it is sky high government and political class spending driving the deficit, primarily in the four categories o Social Security, Medicare, medicaid, and interest payments. There is not enough revenue and wealth that could be taxed out of American citizens to overcome this outlandish spending. Which makes it critical that numerous steps from "Love My Country, Loather My Government" be implemented as soon as possible:
- Step 1 - start reducing Federal government expenditures across the board by 10% a year for at least five years.
- Step 4 - funnel some of these expense savings into the three or four most deadly diseases facing the country today in order to reduce Medicare, Medicaid, and overall medical spending.
- Steps 10, 11, 12 - use these three steps to start fixing Social Security finances immediately.
- Step 28 - convene a panel of experts to determine the underlying root causes of escalating health care costs in this country and implement a plan to attack these root causes, dumping the ineffective and prohibitively expensive Obama Care reform legislation.
- Step 39 - implement term limits for all Congressional members in order to remove the stigma of making the hard economic decisions required to reduce government spending.
Thanks to Mr. Riedl and the Heritage Foundation for helping us destroy this myth. Now that the myths are destroyed, it is time to start dealing with reality and that reality starts with the dumping of all incumbents in November.
Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.
Also visit the following sites for freedom:
http://www.cato.org/
http://www.reason.com/
http://www.robertringer.com/
http://www.realpolichick.blogspot.com/
http://www.flipcongress2010.com/
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