Reply #39: Revenues suffer a one-time drop after tax cuts

[ticktockman]

I have read that the massive deficit is due to our of control spending by our "frugal" administration and congress, but that tax revenues are actually higher now than they were 5 years ago.

Can anyone that knows more about the federal budget comment on that. Is that analysis just spin? Is it possible for tax revenues to increase in spite of a tax rate reduction? (Obviously, the fairness of the tax reduction structure is a question, but a separate one.)

Tax revenues are higher now than they were 5 years ago but the analysis that this proves that the problem is spending, not tax cuts, is deeply flawed. First of all, pretty much all of the increase is due to inflation. The following graph shows revenues, outlays, and deficits since 1981 in real (inflation-corrected) dollars:



The actual numbers and sources are at http://home.att.net/~rdavis2/mts.html . As can be seen, revenues are only back to about where they were in 2000, corrected for inflation. However, also note that revenues have been growing faster than inflation since 1983. The second graph at http://home.att.net/~rdavis2/recsrc.html shows that they've been following this general trend since at least 1940. In fact, the first graph at that URL shows that revenues as a percentage of GDP have been relatively stable. That is, revenues tend to grow as fast as the GDP. This makes sense since both GDP and revenue growth are related to growth in wages and population. Since wages tend to grow faster than inflation (at least, until recently) and the population tends to grow, GDP and revenues tend to grow faster than inflation. Hence, a tax cut will tend to cause a one-time drop in revenues. After that, revenues will tend to continue growing with the GDP, as before.