Assuming President Obama and congressional leaders reach a deal on the debt limit, taxpayers should carefully assess both the spending and revenue sides of the resulting federal budget. The politicians will likely herald the revenue “enhancers” in the agreement as the most significant. But that’s the wrong way to look at a problem that is fundamentally a product of the federal government spending too much, not taxing too little. Since 1960 federal spending as a percentage of gross domestic product has averaged 20.3 percent while federal revenues averaged 18 percent. A 2.3 percent gap between revenues and outlays is not ideal, but it’s manageable over time. The federal government is experiencing historic budget deficits now because, thanks to the recession, federal revenues have dropped to 14.8 percent of GDP, while federal spending under President Obama has soared to 24.7 percent. That is an unsustainable 10 point gap between what the politicians are spending and what the people pay in taxes.
If Congress leaves tax rates as they are today, revenues will likely rebound to their historic 18 percent average by 2018. But over the same period, federal spending is set to rise to 26 percent of GDP, six points higher than the historic average of 20 percent of GDP. That would still leave an eight-point gap between spending and revenues. Unless the government increases taxes to collect far above the record high of 20.6 percent of GDP in 2000, the United States will have to get serious about cutting spending. And the cuts that are being floated by the Obama White House are not serious cuts.
