Taxing matters

Are you ready for a break from the Sunday talk shows? Good. Because here’s a real news flash:

US Government Spending Not Out Of Control

Washington – Despite fours years of Congressional gridlock, or possibly because of it, the share of the economy represented by the US government is once again declining.

Figures from the Bureau of Economic Analysis confirm the downward trend, which presently exceeds the rate of improvement during the Clinton years.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis. 2012 estimated from data through November.

Not what you expected, eh?

Wondering why? How can this be?

The answer lies in the sudden rise in 2009: During the retrenchment of the financial crisis and recession-depression, revenues fell, welfare programs spent more, and Wall Street was bailed out. As the economy has improved, and Congress remains wrapped around its own axle, things are beginning to return to normal.

Now, “normal” may not be quite good enough. But it’s a damn sight better than what much of the blogosphere would lead you to believe.

What about the ‘fiscal cliff’?

The Bush tax cuts were passed in two acts of Congress, beginning in 2001.

These cuts are of course set to expire at the end of this year. More dangerously,. automatic spending cuts are also set to take effect.

Why is this dangerous? Because with growth limited by private debt still being worked out, a drop in government demand will delay and maybe reverse the long-term improvement, both in the economy and (if the economy drags enough) in the government’s share of it.

So why would anyone do such a thing?

Because Congress, in its collective insanity, decided to play a game of chicken with itself. It was good theater. Too bad it’s real.

Isn’t there a real problem with government spending?

If you could spread out the US government’s current receipts of $2.7 trillion, it represents a 19.4% tax on the $13.9 trillion national income, or 17% of the GDP.

Stay with me.

There is a difference between national income and GDP. Most of the difference is what the BEA calls ‘capital consumption’, or what you and I know as ‘depreciation’.

So, roughly speaking, the budget would be in balance, even with the present tax code, if government spending were 17% of GDP, which it nearly reached at the end of Clinton’s second term.

Certainly not an impossible target!

A modest proposal

  1. Trim government spending very judiciously, and over time, using its share of the economy as the metric, not absolute numbers. The time for austerity is when the economy is heating up.
  2. Eliminate the capital gains subsidy in the tax code, and aim at treating all income alike for tax purposes. Accept that government ought not to be using a giant tax hammer to encourage one form of financial activity over another.

Is this really too much to expect?

Related: Why we do it – II

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