The 20% Solution

By John Lumbard.

We think that there’s a good chance for a budget deal in December that will bring our nation’s budget deficits back to a reasonable level.  If we’re right the government’s debt will still be growing, but it won’t grow fast enough to scare foreign investors until large numbers of Baby Boomers begin to collect Social Security and Medicare (thus causing the threat of a Greek debt spiral to return).

 Still, it would be a shame to go through a giant deficit-reduction exercise without creating some new rules that will force our wayward Congress to become more responsible.  We need to cap their spending at the levels of five or ten years ago.

According to figures provided by the White House Budget Office, from 1997 through 2005 there wasn’t a single year in which federal spending exceeded 20% of GDP, and it’s worth noting that we have almost never managed to collect more than 20% of GDP in taxes (the exceptions are 1944, 1945, and 2000, when investors were cashing in their winnings). 

 That time span includes the 1950s, a time when the top tax rate was 91%, and a long stretch in the 60s and 70s when the top rate was 70%.  Apparently it’s nearly impossible to squeeze more out of the taxpayers without sending people with high incomes into an early retirement.  We should set 20% as a constitutional limit, and also establish a balanced-budget amendment for good measure.

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1 Comment
  1. Michael Smith says:

    John, if you’re pinning your hopes on the Bipartisan Fiscal Commission, the history of such exercises is not good, as seen here:

    The trick is to give Congress cover to gore someone’s ox. As long as individual politicians feel vulnerable to charges of heartlessness, they won’t do it. Maybe we can fool them…

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