…because I’m an economist and a mom–that’s why!

Nothing Magical–or Even Sensible–About An 18-19 Percent of GDP Revenue Ceiling

April 28th, 2011 . by economistmom


Bob Williams of the Tax Policy Center feels the way I do about how meaningful–or not–the 40-year historical average level of revenues as a share of our economy is as a guide for where revenues ought to go in the future.  On the TPC’s “TaxVox” blog, he writes:

[T]here’s nothing intrinsically right or wrong with any given level of taxation. As Americans get older, spending on Social Security and healthcare will necessarily rise. Doing what we do now will simply cost more. At the same time, the new technologies that will help doctors provide better care will boost costs still further. And, as we grow wealthier, we may choose to spend more for things we want—helping those in need, improving our roads and schools, or paying to build more and better infrastructure.

Or we may decide we don’t want to do those things. Or we may choose to do them but stop doing other things that we decide aren’t worth the cost—farm subsidies, excessive health spending, and some highly-publicized earmarks come to mind. Or that we’d be a lot more willing to pay for them through a reformed tax system that is simpler, fairer, and more efficient.

Those are political decisions that lawmakers make all the time. But there’s nothing magical about 18 or 19 percent.

Tell that to the Republicans in Congress who have signed a “no new taxes” (of any kind) pledge.  Oh yeah, we have been, and oh yeah, at least some politicians are catching on.  For example, there’s Republican Senator Tom Coburn–who I think truly qualifies as a “deficit hawk” by the way.  From (emphasis added):

Washington (CNN) — A leading Senate conservative said Sunday he can accept tax reform that increases overall tax revenue as part of a comprehensive deficit reduction plan.

Republican Sen. Tom Coburn of Oklahoma told the NBC program “Meet the Press” that if lowering tax rates and eliminating loopholes and deductions ended up bringing in more money to the U.S. government, “that would be fine with me.”

Asked about a pledge he signed previously against any kind of tax increase, Coburn said his more important pledge was to do what’s best for the country. He also noted that political reality dictated the need for bipartisan support for any agreement to pass.

“This isn’t about politics as normal,” Coburn said. “It’s about making a decision now that is urgent.”

In other words, if deficit reduction is really a priority for politicians, and if they are really “deficit hawks” of any variety (whether small-government types like Coburn, or big-government types like the Progressive Caucus, or medium-government types somewhere in between), these politicians would realize that certain pledges they’ve made are far less important than their at least implicit pledge to the American people that they will get our fiscal house in order and not let our economy implode.

These less-important pledges don’t just include the Republicans’ 18-19 percent of GDP revenue ceiling.  They include President Obama’s campaign pledge (made so long ago and way before he even dreamed up his fiscal commission) to not raise taxes on anyone with less than $250,000 income.  There’s nothing magical, or even sensible, about that tax pledge, either, and just like how the Republican tax pledge turns off Democrats (and leads them to call the Republicans crazy), the Obama campaign tax pledge turns off the Republicans, too.

Bipartisan deficit reduction is going to have to involve tax policy, and that means bipartisan deficit reduction is going to require that some of these less-important promises be broken.

22 Responses to “Nothing Magical–or Even Sensible–About An 18-19 Percent of GDP Revenue Ceiling”

  1. comment number 1 by: Gipper


    There’s nothing magical about New Deal and Great Society promises to provide entitlements for retirement and medical security. If we are going to get our fiscal house in order, then Democrats are going to have to accept that those promises are going to have to be broken.

    Medicare will have to be converted into a Medicaid program that means-tests benefits. Social Security benefits will have to be taxed as ordinary income, or nearly so. They will have to become safety net programs in contrast to the retirement foundation programs they have become.

    That is the only way to generate the MASSIVE cuts that will have to be accepted by Democrats as part of a deal for Republicans to raise taxes above 19% of GDP.

    I’m waiting for Democrats to get real on this. I haven’t heard any Democrats to match Coburn with a sense of inevitable compromise on both sides of the ledger.

    However, for a dynamic market economy to work efficiently, then marginal tax rates (state and federal) cannot exceed 40% in the long run. I’m sorry, but matters of social justice have been shown throughout history to be completely irrelevant to the motives of entrepreneurs who take risks to invest and build businesses. So there is a magic percentage of GDP that the government can spend beyond which there is long-term detriment to growth.

    We should invest in educating people to renounce envy of what other people have and focus on building themselves up and taking personal responsibility for their situation in life. Then we’d have a much happier and wealthier polity.

  2. comment number 2 by: Arne

    “However, for a dynamic market economy to work efficiently, then marginal tax rates (state and federal) cannot exceed 40% in the long run. ”

    Just not true.

  3. comment number 3 by: Brooks

    Those who defend subsidies provided as tax expenditures are the “big government types” — they want taxpayers as a whole to continue subsidizing purchases by some people of Product X and Product Y, just as would be the case if the subsidy were in explicit “spending” form.

    Although I generally favor reducing/eliminating tax expenditure subsidies, I don’t see doing so as part of the “higher tax side” of the solution to our fiscal imbalance, because they much more closely resemble spending reductions than they do tax rate increases.

    I wish everyone — particularly conservatives — could see tax expenditure subsidies for what they are (similar to “spending” and meddling with markets) rather than viewing them erroneously as in the same family as tax rate reductions.

    But I’ve sure learned how impenetrable some minds (even otherwise well-functioning minds) can be to that point.

  4. comment number 4 by: BillSmith

    “nothing magical, or even sensible, about that tax pledge, either”

    It helped get him elected.

  5. comment number 5 by: SteveinCH


    Politically, calling tax expenditures equivalent to spending provokes a solution where their elimination increases taxation as a percentage of GDP. Leaving aside our historical debate, that’s the fundamental political issue here.

  6. comment number 6 by: coberly


    I’m glad you understand this… even if your loyal readers don’t.

    Actually, the “progressives” should be saying the same thing:
    It will take a raise in the tax rate to bring down the deficit. And raising the payroll tax to pay for the expected longer retirement of those tax payers.

    If the deficit hawks were honest, or the progressives intelligent, this would be obvious.

    Note… a raise in the tax rate.. not another magical increase in revenues that comes from cutting the tax rate.

  7. comment number 7 by: Gipper


    Unfortunately, the mom doesn’t understand that huge spending cuts will be necessary in addition to the tax increases. Letting go of the Liberal-Progressive dream is real tough so she is still in denial about what will be necessary to be a politically sensible and astute deficit hawk in contrast to deficit Icarus.

  8. comment number 8 by: Brooks


    All you’re doing is stating a matter of fact: reducing/eliminating tax expenditures means more tax revenue (obviously), and thus higher revenue as a percent of GDP. And yes, many people are discussing this issue of an appropriate or ideal % of GDP of taxation (or limit or direction thereof) while totally not getting the point I just made.

    You’re unshakably stuck on a technical difference that is not meaningful, equivalent to seeing a huge — even fundamental ideological — difference between (A) Your handing me $10 while I hand you $1 and (B) Your handing me $9.

    And you don’t realize that eliminating a subsidy in tax expenditure form has the same result for everyone involved as would eliminating the same subsidy in explicit “spending” form: taxpayers who buy Product X end up with less money than they would have if the subsidy had remained, and the Treasury ends up with more money and the deficit is lower. And from that point the same things can happen: keep a lower deficit and/or lower taxes and/or spend more on something else.

    But you and I have been over this before several times at great length as you know, and totally unproductively so every time, and I assume you’re as uninterested in trying yet again as I am.

  9. comment number 9 by: SteveinCH

    And yet, a reduction in tax expenditures is exactly equivalent to a tax rate increase in aggregate. Hence why the President included it in his version of a trigger

  10. comment number 10 by: brooks


    They are only equivalent in the obvious sense that both increase revenues, but substantively they are totally different animals, and that’s part of the point you’re missing. In terms of incentives, rewards, and thus who ends up with less money and on what basis, they are completely different. One is based primarily on someone purchasing some subsidized Product X (and on how much of it he purchases), and the other is based entirely on how much one earns through work and investment.

    Generally speaking, I’d much rather reduce deficits by ending subsidies for paticular products than by raising tax rates, b/c the former just means less government meddling in the economy and less wealth transfer from those who choose not to buy Product X to those who do, while the latter generally reduces incentive to work and invest.

  11. comment number 11 by: AMTbuff

    Consider the exclusion for employer-provided health insurance. That is a reasonably flat benefit across a majority of the workforce. If we revoke that exclusion without reducing tax rates at all, will the money in the government’s hands benefit the public more than it does now in the hands of tens of millions of employees? Progressives and conservatives disagree on the answer. This is why a mass tax break is different from a narrowly targeted subsidy. For the latter, it is easy for both sides to agree that revoking the break is beneficial.

  12. comment number 12 by: Kat

    If you consider incentives “magical” (which, it seems, progressives do), then there is something magical about that number.

    What is it about progressives that make them forget how people work?

  13. comment number 13 by: Brooks


    Whether or not one favors eliminating a given tax expenditure subsidy is one question, but a different one than the question of whether eliminating a tax expenditure subsidy more closely resembles a reduction in spending or an increase in tax rates, which is the question I addressed (and it clearly resembles the former to a much greater degree).

    As for your example, if we ended the exclusion for employer-provided health insurance, it would be more similar to ending an explicit “spending” subsidy for such insurance than it would to a tax rate increase. If we were talking about ending, say, a voucher system (which you’d call “spending”) that provided such a subsidy, you probably wouldn’t be implying that it would only be good to end that subsidy (that spending) if we then lowered tax rates. Your comment thus seems to reflect the confusion I’m talking about. I repeat what I said above:
    eliminating a subsidy in tax expenditure form has the same result for everyone involved as would eliminating the same subsidy in explicit “spending” form: taxpayers who buy Product X end up with less money than they would have if the subsidy had remained, and the Treasury ends up with more money and the deficit is lower. And from that point the same things can happen: keep a lower deficit and/or lower taxes and/or spend more on something else.

  14. comment number 14 by: AMTbuff

    Progressives love distributional analysis of what income levels get how much. The distribution of the health care deduction is closer to a demogrant than anything other than SS benefits. It’s far better than the distribution of government spending programs, where a disproportionate share the money ends up in the pockets of government workers, stimulating the Washington DC area’s economy.

    I really don’t care about Product X as much as care about minimizing the purchase of government bureaucracy. Change the health care exclusion to a flat exclusion of $10k from income for everyone and I’d be happy.

    Let me add that I agree with you that “I’d much rather reduce deficits by ending subsidies for particular products than by raising tax rates”. It’s just that I’d much rather reduce deficits by reducing spending that feeds bureaucracy than be reducing broadly utilized tax expenditures which do not feed bureaucracy. I think the latter are less wasteful and less damaging to the economy. You might not agree, and that’s OK.

  15. comment number 15 by: Brooks


    Apparently you’re not disputing that ending a tax expenditure subsidy is more similar to cutting explicit spending than to a tax rate increase (and is generally preferable). You’re just saying that you’d rather cut spending for subsidies that involve higher administrative costs as a percentage of the spending, and you’re saying that tax expenditure subsidies generally have lower admin costs than do explicit spending subsidies.

    I’d look at admin costs as one factor in deciding which subsidies are even better to reduce/eliminate than others, but the total being spent and what the subsidy is for are also very important factors (obviously), and in any case, it seems we agree that tax expenditure subsidies are similar to spending and are generally undesirable (with some exceptions), and hopefully you see that this undesirability applies whether or not the incremental revenue is then used to cut taxes as opposed to deficit reduction, although it is indeed possible it will be used for different spending that is less desirable, which is something that could be said of any cut in spending that results in higher Treasury funds, and per your very narrow criteria (excessively narrow, in my view) if the result of cutting a tax expenditure subsidy were a shift to some explicit spending program, I suppose you’d consider that swapping out undesirable spending for even less desirable spending.

    Re: I really don’t care about Product X

    Well, I don’t know about you, but I do care — and I generally dislike — government meddling in the economy and also redistributing wealth from people who don’t purchase particular products designated by the politicians to those who do purchase those products.

  16. comment number 16 by: Jim Glass


    Given a forced choice, Republicans almost uniformly place blame for the deficit on too much federal spending, rather than a shortage of tax revenue. Majorities of independents and Democrats agree, albeit by somewhat smaller margins.

    Accordingly, Americans generally favor spending cuts rather than tax increases as the way for Congress to reduce the deficit going forward…

    The problem is …

    Too much spending: 73%
    Not enough taxes: 22%
    No opinion: 5%

    The emphasis on “forced choice” is mine. That’s what polls like this need.

  17. comment number 17 by: AMTbuff

    Brooks, supposed the government had a spending program that gave each taxpayer a check for $5,000, i.e. a demogrant. Wouldn’t it be logical to ask why the government shouldn’t change the checks to a refundable tax credit? In other words, let the taxpayers keep the money rather than spending it. I’m certain you agree with the equivalence for this case.

    What I’m saying is that when the benefits of a tax break flow to a majority or near-majority of the public, you don’t really have a spending program. You have a reduced tax rate. The norm is that you keep the extra money in your pocket. Tax rates were set assuming that the current tax breaks would remain in place. To keep the rates and remove mass-market tax breaks is a tax code design change, not merely a spending reduction as you would like to see it.

  18. comment number 18 by: Brooks


    Yes, if literally everyone were to receive a check for the same amount without doing anything in particular to get it, that would be equivalent to a refundable tax credit (which, by the way, would still require that government send checks to many people, those who would otherwise have had less than that amount of tax liability). It would be equivalent to reducing everyone’s tax liability by that amount. And eliminating that policy would therefore be equivalent to increasing everyone’s tax liability by that amount. (Tax rates wouldn’t be involved)

    First, I assume then that if there were such an explicit spending program — government regularly sending everyone a check of the same amount — you’d object to cutting that spending just as you’d object to cutting the same program in refundable tax credit form. Similarly, I suppose you’d defend a program in which the federal government sends everyone a $5,000 voucher for purchasing Product X if everyone was going to purchase Product X anyway.

    Second, it’s an example that doesn’t really fit what we’re talking about, since we’re talking about some people ending up with more money as a result of buying Product X (or gaining the benefit indirectly via someone else who purchased Product X) and the subsidy existing, and the amount of money they gain is a function of how much they spend on Product X, which will obviously vary significantly from person to person (it’s also a function of their marginal tax rate, of course).

    By the way, I’m surprised you are mixing refundable tax credits into this discussion. Even most folks who don’t get my point about tax expenditure subsidies being similar or equivalent to explicit spending realize, as I think you do, that refundable tax credits resemble spending. It’s apparently harder for them to see the point when applied to credits and deductions that will only lower one’s tax liability.

  19. comment number 19 by: AMTbuff

    >refundable tax credits resemble spending. It’s apparently harder for them to see the point when applied to credits and deductions that will only lower one’s tax liability.

    Yes, your understanding of the difficulty is correct. Some credits and deductions closely resemble spending, some are necessary for horizontal equity, and some are a hybrid. I chose the health insurance exclusion because it closely resembles spending and is not necessary for horizontal equity, but also because it is so broad that it affects most families. The breadth makes a qualitative difference that you don’t seem to recognize.

    My demogrant example was an attempt to prove that my argument works in a limiting case. Therefore it also carries some nonzero weight is less extreme cases.

  20. comment number 20 by: Brooks


    Yes, the closer we come — with an individual tax expenditure subsidy or all of them in aggregate — to giving everyone the same level of benefit for doing nothing that they wouldn’t have done anyway, the closer we are to the equivalent of lower taxation. I think that’s your point, and I concur. It’s not related to tax rates because you’re talking about a uniform dollar amount, but I suppose a similar example could be constructed that would relate more closely to a different in tax rates.

    That said, I think that, generally speaking, reality (for tax expenditure subsidies generally) is a long way from that theoretical scenario, so I’d say that the weight of the argument, while indeed non-zero, is not great. Perhaps you agree.

    And we are left with the conclusion that, at least generally speaking, reducing/eliminating tax expenditure subsidies much more closely resembles cutting spending than it does raising tax rates, for reasons I gave above re: incentives and rewards and the basis thereof.

  21. comment number 21 by: AMTbuff

    It’s definitely less black and white than the term “tax expenditure” implies. I contend that any tax break used by tens of millions of people is closer to a tax rate reduction than to an expenditure. The very breadth shows that people are doing something they were inclined to do anyhow.

    For example, you can argue that the mortgage interest deduction is a giveaway to tens of millions of people who would have bought homes anyway. Or you can argue that it’s a spending program to bribe people to buy homes. But I don’t see how you can argue both at the same time. If you argue the former, it’s a tax rate reduction.

  22. comment number 22 by: Arne

    The mortgage interest interest deduction bribes people to buy larger houses than they would have.

    If you were already inclined to compete with your neighbor, it is a give away.