Optimism Doesn’t Pay the Bills
The White House expects Federal Receipts to grow significantly over the next couple of years and stay higher than they have ever been, relative to GDP.
Since 1971, Government Receipts have annually hovered around 18% of GDP. Since peaking over a decade ago at just over 20% of GDP, revenues have declined all the way down to about 15% of GDP.
The White House plan is to get revenues back up to 20% of GDP within a couple of years and grow it from there.
The problem with this plan is obvious. While declining taxes can help boost GDP growth, rising tax revenues should have quite the opposite effect. Especially if the change happens suddenly, as the White House projects.
Those revenues have to come from somewhere and it is likely they will come from GDP. How would taking 5% out of GDP and giving it to the government have a positive effect on future growth?
And this estimate of 20+% revenue to GDP was before the White House’s plan to raise taxes and reduce the deficit.
Breaking it down further, Individual Taxes and Corporate Taxes would have to grow at rates not seen in decades. Individual Tax Revenue has averaged about 8% of GDP since 1980, while Corporate Tax Revenue has averaged about 2% of GDP.
The CBO projects Individual Tax Revenue will average 10% of GDP for the next decade. Only once in the past 30 years have Individual Taxes been 10% of GDP and that was at a time when the economy was booming, back in the late 1990’s. The impact of higher taxes on a struggling economy is obvious. To make it clearer, the CBO projects that Individual Tax Revenue will grow over $500 billion between 2011 and 2013. That would be about a 3% hit to the economy.
Also note on the chart to the right exactly when the tax increases are expected to kick in right after the next election. No surprise there.
Relying on Tax Revenues staying higher than ever before is setting the Deficit Reduction Plans up for failure. Another case of politicians being too optimistic.
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