Archive for December 7, 2010

The Federal Deficit: A Spending AND Revenue Problem

The past couple days, I’ve been railing against the tax/benefits compromise on Twitter and getting a lot of push-back from the right side of the Twitter-verse. The argument goes something like this:

“The deficit is due to the fact that we’re spending too much, not because we’re not pulling in enough revenue. We have a spending problem, not a revenue problem.”

In response to this, I’d like to submit the following into evidence. It is a graph of the federal receipts and federal spending since 1980, taken from the monthly treasury report, which is as non-partisan a source as possible. The gap between the red line and the green line is the deficit.

Technical note: The data here is inflation adjusted by month and represents a rolling 12 month sum. So, for example, the point for October, 2010 (the latest data point) is a sum of the previous 12 months of receipts and outlays, all adjusted for inflation. This is necessary due to the fact that the treasury reports fluctuate drastically from month to month… especially in April, for obvious reasons.

So, what can we learn from this chart?

  1. our current deficit is driven by BOTH a dramatic increase in spending and a devastating decline in revenue.
  2. the Bush tax cuts are not wholly to blame for the deficit. If revenue had held steady at 2007 levels, we’d still be looking at record deficits based only on the spending increases.
  3. spending increases are not wholly to blame for the deficit. If spending had held steady at 2007 levels, we’d still be looking at record deficits.
  4. compared to revenue, spending is relatively stable, increasing more or less steadily year after year.

That last one indicated to me that the federal government has more control over spending then they have over revenue. Because of this (in my humble opinion) it does make more sense to try to cut spending than to raise taxes, since we have more control over the spending side.

However, we need to look at the situation practically. We can’t possibly cut enough out of the federal budget to balance it without additional revenue. Those kinds of budget cuts are not even remotely feasible politically. I’ve little interest in playing fantasy politics where we magically get rid of a fourth of the government without people lighting their Congressmen on fire.We have about enough revenue to balance a budget from 10 years ago.

The rebuttal, of course is that raising taxes will slow economic growth, which will drive revenue down anyway. I believe there is some merit to this, but does that mean we’re going to just tolerate insane deficits while we wait patiently for the economy to improve?

There is no way to have our cake and eat it too. Lower taxes is quickly becoming a luxury of a country whose financial situation is not dire. If we want to close the deficit, we need more revenue and less spending. Period. Full stop.