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The Blizzard of Statistics and the “Fiscal Cliff”
Washington, December 21, 2012
In the blizzard of statistics surrounding the “fiscal cliff,” two numbers give us the essential bottom line. They are 20.6 and 24.3. Let me explain.
Since World War II, the top income tax rate has varied widely. It has been as high as 94 percent and as low as 28 percent. Usually it was somewhere in between. But in all those 67 years with all of those different tax rates, the revenue collected by the federal government was never higher than 20.6 percent of our Gross Domestic Product (GDP), the most common measure of our overall economy.
At the height of the tech boom in 2000, 20.6 percent of GDP was collected in taxes. Collections were nearly as high in 1945 at 20.4 percent, but the average during these six decades has been 17.7 percent of GDP. Today, tax revenue is about 15.8 percent of GDP.
A number of factors, of course, affect the amount of revenue going to the government, including the health of our economy. It is important to structure our tax code in a way that is as fair and simple as possible and in a way that promotes job creation with higher economic growth and improving standards of living. If more people work and the economy grows, tax revenue for the government will increase. But, even if we achieve economic growth as vigorous as we have seen it in our lifetimes, the plain facts of history tell us that we will not collect more than 20.6 percent of GDP in taxes.
Federal spending today is 24.3 percent of GDP. Let me repeat: Federal spending today is 24.3 percent of GDP. So even if we have the strongest economic growth we can imagine and are able to match the highest tax collections of the last 67 years, it will not be enough to pay for the amount of spending we have now. In fact, it will fall far short. Spending must be reduced in order to get our fiscal house in order, and no amount of argument about the tax rates will change that basic fact.
Most federal spending is in mandatory spending programs, known as entitlements. In fact, more than 60 percent of federal spending goes to entitlements and required interest payments on the debt. Even if the entire military and Department of Defense were eliminated, as well as all foreign aid and departments up and down the National Mall, we would still have an enormous deficit because all of the tax revenue coming into the federal government is not enough to pay for just the spending on entitlement programs today. And it will get much worse in the future as more baby boomers retire, fewer people are working and paying taxes, and life spans continue to increase. If we do not make changes today to reform these programs, they will not exist in the future. There simply will not be enough money.
For all of the rhetoric and arguments flying around, the bottom line is clear, based not on economic theory but on the facts of the last 67 years. Whatever happens on taxes, only by reforming entitlement programs can those programs survive and only then can the United States get its fiscal house in order and fulfill our responsibilities to future generations.
U.S. Representative Mac Thornberry (R-Clarendon) represents the 13th district of Texas in Congress. He serves as Vice Chairman of the House Armed Services Committee and as a member of the Permanent Select Committee on Intelligence.