Posted tagged ‘federal deficit’

“How Did You Go Bankrupt?”

August 13, 2018

How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”   Ernest Hemingway, The Sun Also Rises

This is the literary version of a concern issued many times by the noted economist Rudiger Dornbusch, who liked to say: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

Last Friday’s release of the U.S. “Monthly Treasury Report” shows a continuation of the twin trends of declining revenue and increasing expenditures.

corp taxes and deficit

This is the sort of fiscal stimulus that so many lawmakers argued against as the economy was being pummeled during the “great recession.”  Why is this pro-cyclical rather than counter-cyclical policy now a good idea for those same lawmakers?  Historically the U.S. fills its coffers during good times so we are better able to deal with bad times.  Rising deficits in a strong economy should be more upsetting than the latest presidential tweet. What makes the current situation so unusual and more worrying is the low short-term interest rates and the high (and rising) level of federal debt.  As interest rates rise the high levels of federal government, corporate and household debt will reveal the folly of credit-inflated growth.

July 2018 Deficit

Where is the Surge in Corporate Tax Revenue?

July 31, 2018

Conservative orthodoxy says that tax cuts always pay for themselves. Unfortunately, there is little empirical evidence to support that. Other than ideologues, few economists believe that recent U.S. tax cuts will pay for themselves. Solid, empirical research suggests that perhaps 35%-40% of the revenue lost from rate cuts could be offset by growth effects. Again, as I have said in prior posts, the best that can be said is that corporate tax cuts lose less money over time.

Change in Corp taxes since tax cut

There are good reasons for cutting taxes and the U.S. corporate rate needed to be cut. But the case for setting tax rates at their lowest possible levels to maximize economic growth, while not increasing public debt, and still providing needed tax funded services is weakened, I believe, when ideologues argue that tax cuts always increase revenues or pay for themselves. Ideologues argued that the recent federal corporate rate cut would pay for itself and incentives to “repatriate” overseas profits would offset the rate drop. Six months into the rate cut corporate tax revenues are down 20% to 30% depending on the metric used, with no signs of improving, and with the U.S. deficit hurtling toward $1 trillion faster than expected.

How Much Federal Government Revenue is Enough?

November 14, 2012

Federal government revenues as a percentage of gross domestic product have averaged about 18% over the past 50 years (the median is also 18%).  Federal government revenue is “pro-cyclical,” that means revenues as a percentage of GDP grow when the economy is stronger, as profitability of businesses increases and as individual wage, salary and investment income is increasing.  This relationship has a couple of important implications: First, it can confound ideological interpretations of the appropriate level of current revenues as a percentage of the economy because higher revenues as a percentage of GDP aren’t associated with slow growth and low percentages aren’t associated with higher rates of economic growth – just the opposite is true (with the exception of the dual recessions of the early 1980s), second it suggests how important economic growth is to revenue growth and thus to potentially reducing the nation’s budget deficit.

I haven’t done the math but others who have indicate that the various deficit reduction proposals all require revenues as a percentage of GDP of over 18%.  The U.S. House passed Ryan budget proposal would produce estimated revenues as a percentage of forecast GDP of approximately 19%, the President’s proposals would produce estimated revenues at 20% of GDP, and the “Simpson-Bowles” model would result in estimated revenues as a percentage of forecast  GDP of 21%.  That doesn’t sound like much of a difference, but in an economy with a GDP of $15.5 trillion each 1% increase equates to $155 billion in revenue.  Going from federal revenues that are 18% of GDP to 21% implies a revenue increase of $465 billion.   I could be ok with that if the bulk of the increase were the result of a roaring economy producing large increases in profitability and income, but that isn’t the foundation of any deficit reduction plan and it is hard to see a scenario where $465 of additional revenue is consistent with a high growth economy (the pro-cyclical nature of revenues aside – that relationship isn’t  infinitely linear).  The national debate over reducing our nation’s budget deficit is framed by two choices or their combinations,  increasing tax rates (or eliminating temporary reductions and reducing tax breaks etc.) or by cutting spending.  Revenues at 18% of GDP seems to have worked reasonably well over the past one-half century with the past decade being the exception.  It may be time to aim for a different ratio for the sake of longer-term fiscal balance, but I wouldn’t do it without first exhausting opportunities for spending reductions that maintain a ratio close to the historical average of 18%.  But whatever the combination of spending reductions and revenue increases that eventually becomes the strategy for addressing the nation’s long-term fiscal imbalances, I hope economic growth is the ultimate goal, because as the chart above shows, achieving that goal will make addressing fiscal imbalances a much more manageable task.


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