Monday, April 7, 2014

If It Doesn't End, Is It The End Of US?

April 15 is just about upon us. It's tax time once again. As you prepare and file your tax return consider these facts.

I recently read that in the first five months of the 2014 fiscal year (October 1-February 28) the federal government brought in a record $1,104,947,000,000 in tax revenues.

What is even more interesting is that this is a record even in inflation-adjusted (real) dollars.

Check out the chart below to see federal revenues over the last 30 years in constant dollar terms for the first five months of each fiscal year.


This should come as a surprise to liberal Democrats who seem to think that all of our problems stem from the fact that we are not taxing people enough (especially those evil rich people).

The fact is that tax revenues today are almost double what they were in 1985 in constant dollar terms!

Despite all of this tax revenue, the federal government still ran a deficit of $378 billion for the first five months of the 2014 fiscal year. That means that we are borrowing (printing) about one out of every four dollars that we are spending at the federal level.

What I found even more interesting is if you also adjusted spending for inflation, the amount of federal receipts projected for the full year in 2014 would have generated a federal government surplus in every year of the republic before fiscal year 2006!

Here is a chart I prepared using historical full year numbers ( 2014 projected) for outlays from historical data of the Office of Management and Budget of The White House back to 1940 using 2014 constant dollars that shows this in graphic form.

Source: Office of Management and Budget

You get a real appreciation for how much federal government spending has increased in real terms when you realize that in today's dollars we were only spending about $1 trillion per year during the height of World War II.  Compare that to the $3.6 trillion we are spending today.

To put this in better perspective, in "real" terms we are spending 5 times what we spent when Kennedy took office, 2.3 times more than when Reagan took office and 1.5 times what we spent when Clinton was President just 15 years ago.

What is incredible is that if spending since 1989 had merely increased at the level of inflation we would now be running a federal surplus of almost $1 trillion at current levels of federal receipts.

Why do I bring up 1989?

When President George H.W. Bush took office in early 1989 he pushed hard to implement what he called a "flexible freeze".  This was Bush's response to those who decried his famous (and later infamous) line in his acceptance speech at the 1988 Republican Convention in which he exclaimed, "Read my lips, NO NEW TAXES".

This is how economist Martin Feldstein described the mechanics and rationale for a flexible freeze back in the Fall of 1988 in the Los Angeles Times.

George Bush describes his plan for shrinking the federal deficit as a flexible freeze. What exactly does that phrase mean? And does it represent a plan that can really work?
The flexible freeze is a specific plan for limiting the growth of government spending. The basic concept is that total federal spending should not grow faster than inflation until government spending and revenue are brought back into balance. Tax revenues increase in a growing economy even when there are no increases in tax rates and no new taxes. So as long as the economy continues to grow, a freeze on the inflation-adjusted level of spending would eventually eliminate the deficit.
The difficulty of using a freeze plan to deal with the deficit is political rather than economic. The Bush plan recognizes that an across-the-board freeze on all spending programs would be politically impossible. That's why the plan includes flexibility, or the option for some programs to grow more rapidly than others as long as total spending just keeps pace with inflation. The flexible freeze, then, balances faster growth of spending in some areas with slower growth in others.

Of course, Bush broke his pledge in a deal he cut with the Democrats in an attempt to get a bipartisan budget reduction package to prevent a feared government shutdown that he thought he would be blamed for. Nothing much has changed on that front, has it?

A little over a week ago I also saw this news item that I thought was also interesting.

The John F. Kennedy Presidential Library and Museum today named Former President George H. W. Bush this year’s recipient of the John F. Kennedy Profile in Courage Award "in recognition of the political courage he demonstrated as President when he agreed to a 1990 budget compromise which reversed his 1988 campaign pledge not to raise taxes and put his re-election prospects at risk."

I greatly respect President Bush but there is no way he should get a Profile in Courage Award for reneging on a campaign promise and raising taxes.  He deserves it for his determination to free Kuwait from Saddam Hussein but not for taking the easy road out on trying to balance the budget.

Let's save the Profile in Courage Award to the first person in Washington who will actually implement a flexible freeze and stick to it. It is the only realistic way to get to a balanced budget. George Bush had the formula but lacked the faith and fortitude to follow through.

The numbers above tell the story. It is not magic.  It is math.  Spending has to be constrained to increases below the level of revenue growth in order for the budget to eventually be balanced.

Over time, there has always been plenty of money coming in. Innovation, ingenuity and productivity advances in the private sector has provided that. At the same time, Government has always had a problem of living within its our means no matter the amount of money flowing in.

Look again at the chart above that shows the steady, inexorable growth in federal outlays in constant dollars.  Where does it end?  If it doesn't, is it the end of US?

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