Tax Revenues Projected to Hit All-Time High in 2013

Posted: Mar 05, 2013 10:19 AM

The Congressional Budget Office anticipates that federal tax receipts will hit an all-time high of $2.7 trillion this fiscal year, yet the annual deficit will still clock in between $800 and $900 billion.  We have a spending problem:

An impasse over the shape of the federal budget keeps boiling down to this basic plotline: Democrats say the solution to high deficits must include more tax revenue, while Republicans say the fundamental problem is spending. Failure to reach a middle ground has prompted automatic spending cuts known as the “sequester” to go into effect. This wasn’t Plan A, or even Plan B, for either side. As the politicians look for a way forward, conservative lawmakers say that new budget projections make their case for them. Federal tax revenue is forecast to hit a record $2.7 trillion this year, according to the Congressional Budget Office (CBO). “Spending is the problem, which means cutting spending is the solution. It’s that simple,” said Rep. Cathy McMorris Rodgers of Washington State on Saturday, as she gave congressional Republicans’ weekly address to the nation. She cited the CBO forecast of record revenues...If $2.7 trillion in revenue materializes this year, that would set a record. It would surpass the prior peak of $2.6 trillion, set back in fiscal year 2007 before the recession began.

Denialist Democrats can fulminate and demagogue, but they can't slay this math with populist slogans.  The federal government is expected to rake in more money from its citizens than ever before, yet it will still spend beyond those substantial means by roughly $850,000,000,000 this year alone.  USA Today reporter Mark Trumbell insists that the GOP's "spending problem" rhetoric still isn't reflective of an open-and-shut case:

Case closed? Not so fast. The budget numbers tell a more complicated story – one that makes fiscal politics difficult for both parties. Yes, if $2.7 trillion in revenue materializes this year, that would set a record. It would surpass the prior peak of $2.6 trillion, set back in fiscal year 2007 before the recession began. But that doesn’t mean federal tax receipts are fully back to normal. Economists generally compare taxes and spending to the size of overall economy. That’s because demands on government often increase as the economy grows and population rises. And the value of tax receipts needs to be adjusted for inflation, to give a real sense of purchasing power. Tax revenue will total 16.9 percent of gross domestic product this year, the CBO predicts, compared with 18.5 percent of GDP in 2007. It looks as if it will take another year, until 2014, for tax revenue to get back to 18 percent of GDP, which has been the average level since 1973. But here’s the big issue: There’s no level of tax revenue or federal spending that’s automatically the “right” level. Yesterday’s averages don’t tell us what tomorrow’s should be. And most signs point toward difficult choices ahead. Entitlement programs including Medicare, Medicaid, and Social Security are taking up an ever larger share of federal spending. Is spending “the problem”? Yes, in one sense. If federal outlays could be steered permanently back to their 35-year average of 21 percent of GDP, much of the national-debt problem would be solved. But the answer is no in another sense. In polls, Americans are generally reluctant to see cuts in those major entitlement programs. They don’t call Social Security or Medicare “the problem.”  

Trumbell makes two basic arguments here.  Let's examine each:

(1) Revenues may reach a numerical high this year, but they'll still be lower than the historical average, as a percentage of the economy.  This is true; although, as he notes, we'll likely hit that multi-decade equilibrium next year.  But as Philip Klein reported last month, the CBO projects revenues to zoom past the historical average over the next decade, yet deficits will continue to explode the national debt.  By the end of the current budget window, the annual deficit will climb back into the trillion-dollar range -- again, despite higher-than-average revenues (as a percentage of GDP), much higher raw revenues (in dollars), and much lower defense spending (also as a percentage of GDP).  Klein added this perspective:

Despite the fact that new tax revenue will be drastically outpacing growth in the defense budget, the nation is still projected to accumulate an additional $7 trillion in deficits over the next 10-year period, bringing the public debt to $20 trillion. The cause of that debt, therefore, cannot be taxes that are too low or defense spending that's too high. In fact, by 2020, Congress could vote to eliminate all military spending and it wouldn't even be enough to cover interest payments on the national debt.  

(2) Even though the rudimentary arithmetic confirms that overspending -- not undertaxing -- is fueling our debt crisis, public polling indicates that the public isn't willing to identify popular, expensive programs as the problem.  On one hand, the American people do recognize the government's spending problem and are demanding spending restraint.  On the other, Trumbell is right: Most people have little appetite for even modest reforms to the entitlement programs whose unfunded liabilities threaten to swamp the solvency of the country.  But a poll that says a lot of people don't want to call Medicare's unpaid-for promises a problem does not negate the fact that they are.  Public opinion matters a lot in politics, but it is not the arbiter of empirical reality.  Trumbell writes that spending is the problem "in one sense." Yeah, the math one.

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