Pet Peeve

[rowyn]

Reporting on the US federal gov't's deficit always talks about the raw numbers: ($1.35 trillion!) Sometimes it mentions percentage of GDP (9.2%!)

It hardly ever talks about government income.

I get the feeling that government income generally goes up and down in a way that has very little to do with raising or lowering taxes, and a great deal to do with whether or not the economy is booming. But I don't really know, because 'how much money does the government receive?' isn't a question reporters are interested in answering. v.v Maybe I'll dig through the CBO's website and see if they can tell me.

Comments

[xthread.livejournal.com]

I get the feeling that government income generally goes up and down in a way that has very little to do with raising or lowering taxes, and a great deal to do with whether or not the economy is booming

Very much so, modulo some delays because some income sources are counter-cyclical, and some are decoupled (eg, Estate Taxes). But if your tax system is strongly tied to income (personal or business, it doesn't matter), then government income is going to look like a magnified graph of underlying economic activity, and if the tax system isn't strongly tied to income, then it's going to make the bad times hurt even worse.

[rowyn]

And US federal gov't revenue is *definitely* tied to income. It's something like 50% income tax, 40% social security/medicare/medicaid, and 10% everything else.

[level-head.livejournal.com]

The other common confusion is the difference between the "deficit" or "surplus" (how close the government is to break-even in a given year) versus "debt" (what all those deficits and interests have accumulated to).

The expression "reducing the deficit" simply means "spending more than we have, but not by as much as we once thought we might." It's a pretty silly gage of success.

It is disappointing to me that no one in recent decades has seriously proposed to pay off the debt. Even the "surplus" of 2000 was largely an artifact of revenue increasing faster than spending bills could be put in place -- that spending continued to increase in 2000 and 2001 though the revenue was by then dropping fast.

Traditionally in the US for the past several decades, reducing the tax rate has increased the total tax revenue. Kennedy, Reagan and Clinton each did this. And increasing the tax rate has acted to depress revenue and to extend recessions. The recession that started mid-2000 ended quickly with the tax cuts -- though the timing of recession starts and stops is surprisingly political.

The Muslim economist Khaldun worked out ways of figuring out the most advantageous tax rates using this concept about 600 years ago.

The biggest complaint about this tax rate/tax revenue balance, now called the "Laffer curve," is that it doesn't address spending at all. That's true enough; you can outspend any supply of revenue if you are as diligent about it as the US government is.

Note that whether the economy is rising or falling, the CBO is required to project things forward as if they will remain the same, or more specifically not taking any sort of tax policy into effect. This produces some odd (and wildly misleading) results.

===|==============/ Level Head

[xthread.livejournal.com]

The recession that started mid-2000 ended quickly with the tax cuts

I think your thesis underestimates the impact of dramatically lowering the federal interest rate in early 2001.

[level-head.livejournal.com]

That certainly had an effect -- and perhaps the magnitude can be judged by the tremendous boom that we're in now as a result of lowering it even further.

In all seriousness, it was one of many factors, but it has not proven to be the way out of recessions. It certainly can contribute, though.

In retrospect, it's strange to remember what business and real estate was like during the Carter years when the rate was several times the current values. For some purposes, the change in rate -- and the rate of that change -- can be as effective as the absolute value.

Reading the news after each drop or rise shows how fired up people get over such changes. And that can have, and does have, a real economic effect.

===|==============/ Level Head

[rowyn]

I can't help feeling that the main thing the rate drop did, both in 2000 and 2007-8, was prop up the housing market. Which can't really be propped up *enough* any more. :/

[terrycloth.livejournal.com]

Well, looking at some charts, it looks like government revenue has wiggled between 16% and 20% of GDP basically forever. It does sort of beat the GDP when the economy is up, but the variance is like 2%, which seems pretty small to me.

I do remember at one point noticing that since the Reagan years, the federal deficit was almost exactly the same as the interest on the federal debt. This is probably not the case for this years deficit. MY GOD.

[rowyn]

Looking at gov't revenue as a fraction of GDP to determine how much revenue is tied to economic growth seems wrong to me, because the GDP is itself tied to economic growth. Eg, if the GDP grows by 5%, we're having an economic boom. If gov't revenues also grow by 5%, the gov't will be happy about the raise. But the GDP:Revenue ratio wouldn't change.

OTOH, the correlation isn't that simple -- revenue is running at 14.8% of GDP for fiscal year 2009, according to the WSJ. And the WSJ thought that the ratio was a meaningful way to measure revenue, so maybe I'm missing something?

[terrycloth.livejournal.com]

Well, what I meant was if they're talking about the GDP it's a useful proxy for talking about revenue. Although (as someone else mentioned) it does wiggle a little in addition and in sync which acts as a magnifying factor. But the wiggle seems pretty small.

And since 'GDP' is the figure people keep tossing around, noting that revenue is historically low as a percentage of GDP is also worth talking about, maybe?

Still, when the deficit triples year to year -- that's not caused or even significantly affected by revenue or GDP or the economy. Unless you count the government programs enacted in response to the state of the economy.

[rowyn]

The thing that really bugs me is that last year's 900 billion dollar stimulus package was supposed to be a one-time thing, and TARP -- another 700 billion from 2008 -- was also supposed to be a one-time thing (most of which has been paid back). So why the heck is the budget projected to be just as large in 2010 as it was in 2009? O_o

[terrycloth.livejournal.com]

It is? The charts I was looking at might be out of date, then, they showed it dropping by at least 500 billion. Assuming budget = revenue + deficit.

Is it possible that the stimulus package was 900 billion total over X years?

Revenue being a low % of GDP during a recession is a good thing

[(Anonymous)]

Economists use the phrase "automatic stabilizers" to refer to the tendency of tax revenues to fall faster than the economy (in part because of the progressive income tax) and spending on programs like unemployment compensation to rise as the economy declines. Unlike "stimulus" bills which are often designed to be the starting point of long term programs, automatic stabilizers provide stimulus in a way which will automatically expire as the economy rebounds.

Re: Revenue being a low % of GDP during a recession is a good thing

[telnar.livejournal.com]

That was me, btw -- I noticed after posting it that I wasn't logged in.

Re: Revenue being a low % of GDP during a recession is a good thing

[rowyn]

It's okay, I could tell it was from you. :D Although having you signed in does make it easier to reply. Anyway, the "automatic stabilizers" is good to hear, since I was wondering how much of the drop was from "tax credits" getting treated as a decrease in revenue instead of the wealth-transfer spending that they really are. :/

Re: Revenue being a low % of GDP during a recession is a good thing

[telnar.livejournal.com]

Tax credits are a part of that number, but a smaller part than the inherent counter-cyclical pieces of the tax code. For an example, visualize how much the capital gains tax would collect in 2009.