The chart below is making the rounds at liberal news outlets today. I wasn't going to comment on this because I don't like engaging deeply partisan topics at this blog, but the stat guy in me just can't keep quite. ;-) Here is the chart:
I'm going to take the percentages at face value. The chart selectively lists five expenditures. It then adds an alleged revenue reduction on top. The impression left is that if tax rates had been left at pre-tax cut levels, the orange part of the debt would not be with us.
This treats revenue as though it were purely a function of the tax rate. It isn't. Revenue is also deeply influenced by the overall size of the economy to which the tax rate is applied. The tax rate and the size of the economy are inextricably related. The higher the tax rate, the more money is taken out of the private sector, and the slower the economy grows. The lower the tax rate, the more money stays in the economy, and the faster the economy grows. (Clearly neither 100% taxes nor 0% taxes is feasible, but there is a range in which the logic I'm describing applies. And, of course, things other than tax rates can influence the growth of the economy.) It is conceivable to end up at the exact same revenue over time using two different tax rates ... one resulting in a larger piece of a smaller whole and the other resulting in smaller piece of a larger whole.
Therefore, the orange part of the chart should be the net difference between revenue forgone through tax rate reduction and the increased revenue received because of applying the lower rate to a larger economy. It is concievable that the net difference is that revenue is higher than it would otherwise have been.
Here is a more helpful chart in my estimation (Source):
Revenue has averaged 18% of GDP over the past fifty years, hovering between 16-20%. As you can see, the Bush tax cuts left revenue at about 18% just prior to the most recent recession. Had the tax cuts behaved the way CBPP chart suggests, we should now see revenue as percent of GDP at historic lows. It is at 17%. Enhanced economic growth appears to have offset the revenue lost from the reduction in the tax rates.
Meanwhile, spending has averaged 20.4% of GDP during the same era, hovering between 18-23.5%. Note the upward slope from 1960 to the early 1980s, and then the downward slope until Bush II took office in 2001. Then there is some growth in spending until the recession hits. Then spending explodes to historically high rates. There is now an 8 point difference between revenue (17%) and spending (25%). Revenue is slightly below historic averages while spending has exploded.
The Obama campaign is fixated on increasing taxes on the top 1%. If were to tax all income over one million dollars, then we would raise about $500 billion to apply to a $16 trillion debt. (And since most investment income would be sucked out of the private market, the economy would collapse, leaving us with a far smaller base to tax.) There may or may not be good reasons for increasing taxes on the top 1% by a couple of percentage points but this is nearly inconsequential to addressing budget deficits that compell us to take on more debt. The answer has to be primarily focused on some combination of economic growth and reduced spending (primarily through entitlement reform.)
There. I feel better now. ;-)
