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Congress Doesn't Lack Tax Revenue -- Democrats and Republicans Have a Spending Problem

04/18/2018

Opponents of the Tax Cuts and Jobs Act, which delivered much-needed tax relief to the middle class and business owners large and small, have complained that the law is contributing to the increase in expected budget deficits over the next ten years. Certainly, budget deficits are a serious concern, and Congress has shown no interest in addressing the problem.

Despite the literal apocalyptic rhetoric from some opponents of the tax bill, including House Minority Leader Nancy Pelosi (D-Calif.), the recent Congressional Budget Office (CBO) report shows that projected tax revenue collections are close to the average of the previous 50 years, from 1968 through 2017. During this 50-year period, tax receipts from sources provided by the CBO averaged 17.4 percent of gross domestic product (GDP). Under the Tax Cuts and Jobs Act, the projected tax receipts will be 17.1 percent of GDP over the next 11 years, 2018 through 2028.

Tax Receipts

As the chart above shows, individual income tax receipts are actually projected to be higher as a percentage of GDP than the previous five decades. Now, some may say the comparison isn't accurate because the individual tax cuts in the Tax Cuts and Jobs Act will expire at the end of 2025 unless Congress extends them. That's true. But if we cut the projected tax receipts off after 2025, individual tax receipts would be 8.4 percent of GDP, higher than any of the any of the previous five decades. (Click here to see a larger version of the chart below.)

Revenues as a Percentage of GDP: 1968-2028

The real problem is spending, folks. Even though projected tax revenues are only percentage points of GDP less than the average of the previous 50 years, spending will continue to grow. Between 1968 and 2017, federal spending averaged 20.3 of GDP. There were occasions in this 50-year period when spending eclipsed 21 percent of GDP, most recently between 2009 and 2012 when the neo-Keynesians in the Bush and Obama administrations believed they could spend the United States out of a recession. Federal spending in this four-year period averaged 23.3 percent of GDP.

Federal Spending as a Percentage of Gross Domestic Product

Unfortunately, the CBO projects that federal spending will begin to grow above the historical average. Over the next 11 years, federal spending will exceed each of the previous five decades. By 2028, federal spending will consume 23.7 percent of the economy, a level eclipsed only once, in 2009, between 1968 and 2017. This is in large part to the growth in mandatory spending, which includes earned entitlements like Medicare and Social Security, as well as Medicaid and other welfare programs. (Click here to see a larger version of the chart below.)

Actual and Projected Federal Spending: 1968-2028 (Dollars in Billions)

The growth of mandatory spending is not a surprise. Yet, members of Congress from both parties continue to ignore it, preferring to kick the can down the road to let a successor address.. But mandatory spending will eventually leave Congress with tough choices. They will either have to reduce spending on defense and/or nondefense discretionary programs to mitigate the growth of mandatory spending. The recent budget deal, however, essentially guarantees that this scenario won't happen. A new baseline for spending has been created for FY 2018 and FY 2019, setting up spending increases in the out years that CBO doesn't measure because it's not current law.

Increasing taxes is another option, but it comes with a steep price: diminished economic growth. Some combination of spending reductions and tax increases is an option. Doing nothing is another option, but that presents another set of problems if borrows begin to worry about the United States' ability to pay debt. Such a concern will lead to higher interest rates, leading to an increase in payments for debt service, which is another aspect of federal spending that is on the rise because of large deficits.

Democrats, as well as some Republicans, who are complaining about the Tax Cuts and Jobs Act are ignoring the growth of federal spending. It has been said before, but it needs to be said again -- Congress doesn't have a revenue problem; it has a spending problem. Revenue collections are projected to be near historical averages. Spending, however, will continue to rise until the political will exists in Congress to address this fiscal challenge.