Pethokoukis

Is 18% of GDP revenue a realistic number going forward?

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Over the past half century, federal government revenue has averaged around 18% of GDP. But is that a realistic marker going forward given the aging of America? Last year a group of AEI scholars put together a long-term budget plan. Here is a comparison of its top-line numbers versus a baseline put together by the Peterson Foundation;

The AEI scholar budget spends less and raises less and has a smaller deficit/debt than the Peterson baseline. (And the debt numbers are considerably smaller than Congressional Budget Office projections which show federal debt soaring to 62% of annual GDP in 2010 to 87% in 2020 and 185% in 2035.)

Yet it taxes and spends more than the post-war average. The plan contains sweeping entitlement reform (including converting Medicare into a premium support plan) and tax reform (dumping the income tax for a pro-growth progressive consumption tax and replacing energy subsidies, credits, and regulations with a carbon tax). The proposal assumes that defense spending would average 4% of GDP over the long term.

The point is that the U.S. may need to raise more revenue as a share of GDP than it has historically. Entitlement reform will help keep that number as low as possible and tax reform can boost revenue without slowing growth. Still, I wonder if the spending is too high and revenue too low given the still quite substantial deficits that the AEI scholar plan runs. But plan does give a good perspective on the fiscal constraints involved and the sorts of choices that need to be made. The report’s conclusion:

There are no easy solutions to the country’s fiscal crisis, and further delay will only make the decisions harder. An aging population will put increasing demand on government health and retirement programs, whose costs are borne by younger generations worried about paying for their own families’ needs. The challenge is finding a balance between those competing demands. A fiscally sound policy will require greater self‐reliance, but does not mean that our society will turn its back on the elderly and the less fortunate. Our plan narrows the fiscal imbalance, limits the size of government, and adopts a more growth‐friendly tax code. Although this plan will require difficult choices, it will ensure a vibrant economy and fiscal stability, now and in the future.

3 thoughts on “Is 18% of GDP revenue a realistic number going forward?

  1. The point of the 18% of GDP figure over 50 years is that that is all the taxes the economy can absorb. Tax rates for all the different types of taxes have changed dramatically over the past 50 years, yet tax revenues always trend to 18% of GDP no matter what tax has what rate structure. You cannot extract more than that from the economy on a permanent basis, that is simply the public’s maximum pain tolerance for taxes. There is no raising more revenue as a percent of GDP, it cannot be done. The ONLY choice for long-term fiscal solvency is to reduce expenses. If we, collectively, refuse to do that, then we will go bankrupt. That’s all there is to it.

  2. “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.” – Milton Friedman
    “[T]he burden of government is not measured by how much it taxes, but by how much it spends.” — Milton Friedman

    • Both of the above comments are off base. Federal receipts were above 18% from 1995 to 2001, at a time of historically low unemployment and strong economic growth. Federal spending has averaged over 20% of GDP during the past 40 years, during both Democratic and Republican administrations. If we are serious about the deficit, we should raise the revenue necessary to pay the bills. If we are not willing to raise that revenue, we should be clear with voters what we propose to cut–Social Security? Medicare? Defense?

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