Do we really have a revenue problem?

posted at 9:25 am on July 7, 2011 by Ed Morrissey

Over the last couple of days, we’ve had a good debate at Hot Air over the nature of our fiscal crisis between Jazz Shaw, and J. E. Dyer, and me.  At least we all recognize that we have a fiscal crisis; some members of Congress and “intellectual authorities” (with interesting if unreported conflicts of interest) still act as though nothing at all is wrong.  My friend Jazz wrote yesterday that we have a revenue problem as well as a spending problem in answer to my post rebutting David Brooks’ column, so let’s take a look at federal revenue to see whether Jazz’ contention holds up.

The Heritage Foundation provides this chart of federal revenue over the last 50 years in inflation-adjusted 2010 dollars, and the data is pretty clear that we have a recession problem, not a revenue problem:

Take a look at the trends here, again remembering that the data is all in 2010 dollars.  In fifty years, we have tripled overall federal revenue, and prior to the current recession/stagnation we had quadrupled it.  The current trough from the 2007 peak resulted from the fall in economic activity, not from tax cuts or any other intervention.  It’s similar to what happened in the prior trough, when the 2000-1 recession and the 9/11 attacks cut economic activity through 2003.

For that matter, look what happened to federal revenue after the much-maligned Bush tax cuts took full effect in 2003.  Economic activity expanded rapidly — and so did federal revenues.  In fact, the economy during that period boomed, and receipts from both personal and corporate taxes peaked as a result.  The Bush tax rates, as they are properly called today, did not create a revenue vacuum; they helped produce an expansion that enhanced rather than lost revenue.

Now, let’s put the data in this chart with one showing the rate of spending in inflation-adjusted 2010 dollars:

While revenues have tripled during this period, federal spending has more than quintupled.  The economic expansion of the 1990s (including the dot-com bubble) temporarily raised revenue above the spending trendline, but the slope on spending increased in the early 2000s, and practically launched spaceward in 2007 when Democrats took control of Congress.  Had spending increased at a rate of inflation from 2001 forward, we would probably not been in deficit at all.  Had it stayed at the rate of inflation from 2006 forward, we’d probably be looking at historically average deficits in terms of GDP.  But the chart shows very, very clearly that we have a recession problem combined with both a short- and long-term problem with expanding federal budgets — and the latter is the reason why we have a fiscal crisis, not some presumed revenue starvation.

It’s true that most of that spending problem comes from entitlements.  That’s why Republicans have focused their efforts on that sector of the federal budget, and not on hiking taxes.  The GOP wants to attack the recession problem by rolling back the regulatory adventurism of the Obama administration, especially in ObamaCare and at the EPA, in order to stimulate the economy and recover the revenue that we’re losing in the recession/stagflation period.  Raising taxes will have the opposite effect, and as we have seen any number of times, will not produce the revenues estimated by tax-hike advocates using static tax analysis.

Let’s confront the real problem in our fiscal crisis, and not make the recession crisis any worse than it already is.

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