The Associated Press (AP) reports the federal budget deficit swelled to $779 billion in FY 2018, the largest level since 2012 and 17 percent higher than FY 2017. Additionally, the Treasury Department forecasts the deficit will increase again in FY 2019, to over $1 trillion—the first time since 2012 the federal deficit would top the trillion-dollar mark.
AP and other outlets blame the budget imbalance on the failure of tax revenues to keep up with increased government spending. This assessment is partially correct, but it misses the fact that spending is increasing much faster than revenues—either actual under the Trump tax cuts or projected in the absence of said cuts. The federal government actually took in record revenues in FY 2018 for individual incomes, nine months of which occurred after Congress and the president cut corporate tax rates by nearly one-third. Corporate rates were down, but the decrease was not sufficient to plunge total revenues of a cliff.
The federal government usually brings in higher revenues each new fiscal year—barring a recession—but revenues are in line with historical averages (as a percentage of GDP) for fiscal year 2018. The federal government’s estimated $3.328 trillion in total tax revenue for FY 2018 is 17 percent of US GDP for the same year. The average intake of tax revenue as a percentage of GDP in the post-World War Two era is approximately 18 percent. This means that tax revenues for FY 2018 were slightly below the postwar average. However, tax revenues are ahead of most of the 1960s, when the top marginal income tax rate in the United States was over 90 percent. They are also in line with the average for the 1980s. And further, they are near the average for the post-1990 era, after the dotcom bubble popped.
Therefore, while the United States might have a revenue problem, it has a much larger spending problem. In FY 2018, federal government outlays totaled $4.407 trillion, or, 22.7 percent of GDP. Spending is far more out of line with historical averages than tax revenues. Historically, the postwar average for spending as a percentage of GDP is approximately 20 percent. After the drawdown in major outlays for the Second World War, the federal government has spent greater than or equal to 22 percent of GDP only twice: during the late 1980s defense buildup and in the first few years of the Great Recession, as the Treasury engaged in countercyclical fiscal policy in an attempt to stimulate the economy.
The U.S. has a spending problem and a revenue problem. Both should be addressed. And partisanship and ideology can’t defeat the basic math of the problem: taxes are slightly below average, and spending is much above average and continues to increase. Thus, it is no wonder the deficit is ballooning.
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