Washington Has a Revenue Problem

by Paul Kasriel, The Econtrarian, former Chief Economist, The Northern Trust Company

Republicans want to cut government expenditures by “reforming” entitlements such as Social Security and Medicare. In the past, this has been anathema (I have always wanted to use this word) to Democrats. But what if after a token protest by the Democrats to the “concept” of entitlement reform, the Democrats succumbed with a caveat. That caveat being to means test Social Security and Medicare. That is, as one’s retirement income increased, one’s Social Security benefit would decrease and one’s Medicare premium, including and especially, one’s Medicare Part A premium, would rise. If means testing senior-citizen entitlements were to occur, then not only would upper-income retirees be paying higher tax rates than they were in 2012, but they would be receiving effectively lower entitlement benefits. So, perhaps Br’er Democrat should plead not to be thrown into the entitlement-reform briar patch by Br’er Republican.  (See my Opinion article based on this folk tale.)

Now to some facts. The Republicans argue that “Washington” does not have a revenue problem, but a spending problem. The chart below speaks to this issue. Plotted in the chart are the 10-year compound annual growth rates of total federal government receipts and outlays. In the 10 years ended FY 2012, the compound annual growth rate in federal receipts was 2.83%, considerably below its FY 1965 – 2012 median of 6.75%. Notice that since FY 2003, about the time of the second round of Bush 43’s tax cuts, growth in federal receipts has been much below its longer-run median rate.  In the 10 years ended FY 2012, the compound annual growth in federal outlays was 5.81%, below its FY 1965 – 2012 median of 7.31%, but not as much below its median as was receipts growth. In the 10 years ended FY 2009, compound annual growth in federal outlays hit a recent high of 7.51% , in part because of TARP expenditures, increases in automatic-stabilizer expenditures such as food stamps and unemployment insurance benefits and, of course, Obama’s “stimulus” expenditures.  Since FY 2009, however, growth in federal outlays has been trending lower.

I conclude from these data that the explosion in deficits in the past 10 years has more to do with Washington having a revenue “problem” than a spending “problem.” In the next 20 years, Washington is, however, likely to have a spending problem as more and more of my baby-boomer generation belly up to the entitlement trough. And now with the bulk of the Bush 43 tax rates permanent, Washington will continue to have a revenue problem, too.
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