Paul L. Caron

Sunday, July 17, 2011

Fact Check: Does Washington Have a Spending Problem or a Tax Problem?, Does Washington have a Spending Problem or a Tax Problem?:

Washington's spending has recently been higher as a percentage of the nation's economic output than at any time since World War II. But by the same measure, Washington's revenues are the lowest in more than 60 years.

So does the U.S. have "a spending problem," as Republicans keep repeating in the current debate over how to reduce the nation's record deficits? Or is the problem that taxes are not high enough? Those questions frame a long-running partisan debate, and as usual we won't offer an opinion one way or the other. But for those seeking their own answers, we can offer some fiscal history and factual context.

Some key facts we think are worth considering:

  • Federal spending ("outlays" in budget jargon) is expected to equal 24.1 percent of the nation's gross domestic product in the current fiscal year, which ends Sept. 30. The figure was 25% in fiscal year 2009, highest since 1945.
  • On the other hand, federal revenues are expected to drop to 14.8% of GDP this year, lower even than the 14.9% attained in both 2009 and 2010. There has been only one year since World War II when revenues have been as low as in any of these years: 1950, when the figure was 14.4%.
  • These historically high rates of spending and low rates of taxation have combined to produce a chain of deficits that are also the highest since WWII. The deficit was 10.0% of GDP in fiscal 2009. It declined to 8.9% last year as the economy started to recover, but is projected to go up to over 9% this year. Each of these deficits is larger than in any year since 1945, measured as a percentage of GDP.
  • The U.S. is borrowing about 36 cents of every dollar spent so far this year. It borrowed 37 cents on the dollar last year, and 40 cents in fiscal 2009.
  • The largest components of federal spending are Social Security and Medicare programs for the elderly (33.5% of total outlays in 2010) and national defense (20.1%). Interest payments on the federal debt alone accounted for 5.7% of all federal spending, and that percentage is rising.
  • The federal income tax accounted for 41.5% of federal receipts in 2010 (down from 49.6% prior to the Bush tax cuts of 2001 – 2003). Corporate taxes brought in only 8.9%, also down sharply since the recent recession. Payroll taxes and other "social insurance" payments accounted for 40% of total receipts in 2010.

It's easy to argue one side or the other by just citing facts that support a particular view, and omitting others. In the Analysis that follows, we offer some graphics, details and documentation in an attempt to give our readers a quick look at the entire picture — both where the money goes, and where it comes from.

Breakdown of "other" in 2010
(Percent of total revenues)
Federal Reserve 3.5%
Customs 1.2%
Misc 1.0%
Estate & Gift 0.9%
Total "Other" 6.5%

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I found the analysis of this question by Ironman (Craig D. Eyermann) at Political Calculations to be entirely convincing.

He found that there is "a remarkably strong correlation ... between the nominal level of U.S. median household income and the total tax receipts the U.S. federal government has taken from U.S. households and businesses since 1967, when median household income data was first reported.

"U.S. Total Federal Tax Collections vs Household Median Income, 1967-2009 Our chart reveals the correlation. Here, we've shown the amount of total federal tax collections against U.S. household median income since 1967 on a log-log graph.

"The results are stunning - the coefficient of determination between these two variables is 0.9957, just a bit shy of a perfect correlation of 1.0000."

Quote from and chart at:

He then looked at Federal spending vs. Household Income.

".... we've graphed the trajectory of the total spending of the federal government with respect to the median household income in the U.S. for the years from 1967 through 2009, [and] we see that the U.S. federal government's spending today has decoupled from the primary source of income that is required to sustain it.

"Worse, it has literally "gone vertical" during the last two years. In mathematical terms, that's the sort of thing you see when you divide any number by zero. ...

"In practical terms, that means government spending has become completely disconnected from the ability of the typical American household to support it. And until this skyrocketing spending growth is arrested and reversed, we suspect that government spending has become disconnected from the ability of any American household to support it."

Quote from and chart at:

Like the Gambler said: "Read 'em and weep."

Posted by: Walter Sobchak | Jul 19, 2011 8:11:22 PM

This chart ignores the massive tax burden added by state and local taxes since 1950. For example, in 1959, the top marginal tax rate in California was 4%. Today it is 10.5%.

In 1950, Fed/State/Local revenue was $67B out of a GDP of $293B: 23%
In 2010, Fed/State/Local revenue was $4.2T out of a GDP of $14.7T: 29%
In 2012, Fed/State/local revenue will be $5.1T, GDP headed to $15.3T: 33%.

Posted by: Julius P. | Jul 19, 2011 11:06:44 AM

Using percentage of GDP for these measurements provides a huge bias to increase spending with increases in GDP.

Why should the government be spending more on defense/welfare/farm subsidies/etc.. when GDP goes up? Then they include all that spending in GDP itself? It's nonsensical.

Show the same charts using constant dollars instead of GDP and they tell a very different story over time. Revenue and spending has both been increasing dramatically, with spending increases outpacing revenue increases most of the time.

Then include the state revenues and taxes as well in your charts..

Posted by: Thomas Sewell | Jul 18, 2011 10:46:55 AM

"Revenue" may overlap strongly with "taxes," but not with "tax rate." It's a distinction to be kept in mind in any discussion of changing tax rates. There is no linear effect that says raising the rate increases the revenue. The reverse is more often true (though that's not linear or automatic either).

Posted by: Assistant Village Idiot | Jul 18, 2011 9:02:15 AM

It's a spending problem. But, I don't understand one of the solutions offered,from the ONE, are cuts to Social Security and Medicare. (yes, something has to be done with them, but they are not the problem right now) From above, income from payroll taxes is 40% of the take, outlay is 33 1/2%. Sounds like a nice profit to me (6 1/2%, about the same the EVIL oil companies make).

Am I Wrong?

Posted by: AGuyFromJersey | Jul 18, 2011 8:12:04 AM

we have a revenue problem but I believe it is caused by a spending problem. The spending problem casued this anemic recovery which has led to the drop in tax revenue ...
Fix the spending, fix the economy and the revenues will come back ...

Tax increases will never solve this problem ...

Posted by: Jeff | Jul 18, 2011 7:21:29 AM

Hmmm... make your whole economic structure dependent on one aspect of the economy (high incomes) and then promise and prosecute a war against people with high incomes. It would seem Atlas is Shrugging. As predictable as the sunrise yet no one can see that the cure is the cause.

Posted by: JimmyNashville | Jul 18, 2011 6:55:21 AM

Thank you for providing this. I will assume that Factcheck did indeed provide just the numeric facts.

But in reading through this from the "totally absolutely positively" 'non-partisan' way like Fact Check advertises themselves, and I read it twice, I couldn't help but notice when it came to the Bush years or plans or programs, the descriptions were prefaced with 'massive' or 'overestimated', or some other explanation unnecessary to provide just the facts.

I could have read just the adjectives with the assigned President, ignored the category, and guarantee you I know exactly where both the author's political loyalties lie, and where the author believes the best solution. The author certainly doesn't think we are spending too much.

So count me in the same camp CHHRO1. Until both Fact Check and our Congress can convince me that there are no redundancies, no waste, no fraud, or abuse in any Dept. or Service, they can learn to do without just like the rest of us.

Posted by: Tex Taylor | Jul 18, 2011 6:51:49 AM

This may sound stupid but could you define Pay Roll taxes - is this Social security? does it include both sides, the employer and the wage earner? or is it something else. Thanks

Posted by: harry | Jul 18, 2011 6:18:26 AM

While I am all for a "balanced" approach to our deficit woes, I can't help but think about the massive waste, fraud, abuse, and duplication that our Federal Government has become known for. At the same time, those seeking fed or state assistance find the services they pay for weak and inefficient to say the least. That my friends is the problem. It’s not revenue vs. spending, it’s wise use of spending dollars and we cannot support increasing revenue until that very problem is given the credence it deserves.

In my, oh so very humble, opinion. I do not and cannot support any "revenue" increase unless and until the Feds can prove to me that they are spending my money wisely. I expect constitutional oversight of spending programs, yet most in the House say that the financial crisis "caught them by surprise." I'm appalled and very angry. How dare they tell ME that I MUST continue to support such egregious abrogation of their oath?

I'm eating my peas thank you, it's time the feds considered the same and did the jobs they were sent to Washington to do.

Posted by: CHHR01 | Jul 18, 2011 6:10:26 AM

When you base your entire tax structure on the 'backs of the rich," don't be surprised when it comes up lame when the rich aren't doing so well.
Yes, Virginia. There is a downside to income equity.
When we're all poor, we will all be paying less.

Posted by: Neo | Jul 18, 2011 5:59:52 AM

But being that we are in the great recession, wouldn't it be more of a spending problem? I mean if the economy took off and more people had jobs and unemployment was cut severely, payroll tax revenue should shoot up.

Posted by: Zaggs | Jul 18, 2011 5:52:59 AM

How is it foolish to show the facts? Arguments which ignore reality are what's really foolish, but the article doesn't make any value judgements.

Posted by: GaryD | Jul 18, 2011 4:47:34 AM

What no one wants to discuss apparently is the ever growing underground economy wherein none of the players pay taxes on income. As unemployment grows, so do the numbers of folks who will do anything for under the table cash and while one can understand it, that hole is growing daily and not a thing is done about it.

I live on a Bay and see so many new million dollar boats that I just have to wonder where all this wealth is coming from. But until the government trims itself down and focuses on real problems that might produce significant income rather than the Depends issue pertaining to a 95 year old woman at an airport, things will go on as usual.

The President seems unwilling to take note pf the many redundant and inefficient if not completely no longer needed government jobs that he insists we keep paying for. His experience obviously isn't in business or in balancing a set of books and it shows painfully these days when so many citizens can point to entire departments that are obsolete and could be eliminated to save money.

So until President Obama looks at his own administrative style, it is going to be difficult to find a way to put fairness back into the process which must be done before one more penny is taken from honest taxpayers who are being bled dry already.

And to go after the elderly and infirm as his first choice of cutting things does say something about his personal value system. We keep dropping million dollar missiles and no one thinks of curtailing that sort of expenditure that does nothing but create ill will around the world.

Posted by: foggyworld | Jul 17, 2011 8:23:22 PM

I find effort to achieve a "neutral" perspective on political issues somewhat foolish, and I wish these groups would stop pretending to offer one.

Posted by: mike livingston | Jul 17, 2011 6:48:06 PM