President Obama and his fellow Democrats have called for higher taxes, but tax revenue is already expected to exceed its historical average over the next decade, according to a new analysis by the Congressional Budget Office.
The problem is that historically high tax revenue will be swamped by historically high government spending.
“CBO projects that revenues will average about 19 percent of GDP during the coming decade under current law, above their 18 percent average of the past 40 years,” CBO director Doug Elmendorf wrote in a blog post. “CBO also projects that outlays will average 22 percent of GDP over the next 10 years under current law, above their 21 percent average of the past 40 years. Thus, both outlays and revenues are projected to be higher than their historical average shares of the economy’s total output.”
Though deficits are expected to average 3.3 percent of GDP over the 2014 to 2023 period, which is within range of the historical average of 3.1 percent, deficits are on the upswing at the end of the decade. As Elmendorf writes, “the deficit initially declines from 5.3 percent this year to a low of 2.4 percent in 2015 and follows an upward trend thereafter, reaching 3.8 percent by the end of the projection period.”
It’s important to keep this in mind when you hear Obama — or any other Democrat — discuss a “balanced approach” to deficit reduction that requires higher taxes. The reality is that taxes are not too low, but that spending is historically high. And, by the way, it’s not military spending that’s too high: “defense spending is projected to average 3.0 percent of GDP, compared with a 40-year average of 4.7 percent.”
What’s driving the spending are entitlement programs and Obama’s health care law: “outlays will be above their historical average primarily because the aging of the population, rising health care costs, and a significant expansion in eligibility for federal subsidies for health insurance will push up spending for Social Security and the major federal health care programs (Medicare, Medicaid, and the subsidies to be provided through insurance exchanges).”
For more on this topic, check this column I wrote last month.