The Truth About Deficits: It's All About The Lack Of Taxes

This post previously appeared at MacroFugue.

Whilst the epic debate on the debt ceiling is waged, I thought it was relevant to take a look at the budget balance historically juxtaposed against personal income tax revenues.

Here is a graph comparing Personal Current Taxes as a Fraction of GDP against the Federal Budget Balance as a Fraction of GDP:


Surprise!  It turns out that they are nearly one and the same.  A couple of other observations: 

  1. They are highly cyclical – which should be no surprise:  it’s highly tied to marginal economic activity & employment.
  2. They are highly structural – which also should be no surprise:  tax rates have plummeted for years, while the income distribution has skewed strongly in the favour of high-earners (thus the more highly taxed)

It’s every earning group, as well:  the bottom quintile of earners have seen their tax burden get slashed in half, while the top 1% have seen a reduction from 37% to 29.5%.

This graph comparing Personal Current Taxes as a Fraction of Wages against the Federal Budget Balance as a Fraction of GDP may more demonstrate the falling income tax burdens:


Don’t let this fool you into thinking that I’m an advocate of raising taxes.  The Federal budget deficit is merely a private sector surplus, and the rapidly delevering private sector needs this injection to maintain private sector equity during the process.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at