The Fiscal Cliff Explained, With Links To The White House Budget Office

By John Lumbard.

According to the National Debt Clock, the US is currently collecting about $2.4 trillion in taxes, and spending about $3.5 trillion.

Put another way, we’re collecting 16% of GDP in taxes and spending 23% of GDP on government programs.  Entitlement programs such as Medicare/Medicaid and Social Security are almost 16% of GDP by themselves  (see page 174), so “mandatory” programs are most of the budget and almost all of what we’re raising in taxes.

The only years in which we were able to collect tax revenue greater than 20% of GDP (20% and a fraction, in each case) were 1944, 1945, and 2000.   You can find the whole truth at http://www.whitehouse.gov/omb/budget/historicals/.   The first table gives you more than a century of federal spending and revenue—what we spent, and what we raised in taxes, for every year—and table 1.2 gives you the same numbers as a % of GDP.  Fabulous stuff, and right from the White House Budget Office.  If you’re wondering about the “Off Budget” column, it’s the spending and  revenue (FICA) collected by Social Security and Medicare;  they’re still running a small surplus, which is used to make the “total” deficit look smaller.  (If you thought that the Social Security Trust Fund was a “lock box”, you should read Jim Schaefer’s ‘The Debt The Government Owes Itself For Raiding Social Security”, which includes a link to the Social Security Administration web site.)

Bill Clinton collected more tax than any other president, with a top personal tax rate of about 40%.  In those years all Americans, at every income level, had higher tax rates than they have today.  If we let the “Bush tax cuts” expire we’ll be able to collect 18% – 19% of GDP in taxes (we don’t have as many people employed today as we did in the Clinton years, and we’re not getting as much “help” from the Social Security and Medicare trust funds), but that would mean higher taxes for everybody—and a recession.  And we’d still be spending 23% of GDP.

What if we raise the top tax rate even higher?  Since World War II we’ve had top tax rates ranging from 28% to 70% to 91%, but the only year in which we were able to collect 20% of GDP was 2000, with a top rate of 39.6%.  England just tried raising its top tax rate from 40% to 50%, and the number of people in that top bracket (those earning more than a million pounds a year) shrank from 16,000 to just 6,000.

Congress created the fiscal cliff to force the reluctant media and the unwilling public to look closely at these issues.  Spending will naturally rise as the Baby Boomers retire and begin to draw Medicare and Social Security (which, btw, is a lot easier to fix than Medicare).   The nightmare scenario for the federal debt is that foreign investors will become skittish, and interest rates will rise until the interest on our debt is a trillion dollars a year.   The good news is that interest rates have gone down rather than up, because the Fed has been printing money and buying bonds and mortgages of all kinds.  Who says there’s no such thing as a free lunch?!!?

Alexander Hamilton argued that one of our nation’s greatest assets is its ability to borrow during a crisis.  We no longer have that ability, because we’ve issued so much debt in ordinary times.  Our debt is now larger than our GDP—just about where Greece’s debt stood in 2006—and it’s growing much faster.  Next year our debt will be at the level of Greece 2008. Perhaps we should start thinking about selling off some of our islands . . .

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