The First Step Is Admitting You Have a Spending Problem

The IRS is collecting record revenues again, although I’d wager a big part of the post-crisis increase is not due to healthy growth. Median and average wages are stagnant, the labor participation rate is shrinking, and welfare dependency is growing. Add all that together, and the reason tax collections continue to grow is mostly due in to the Fed re-inflating the equities bubble. If — when — this new bubble pops, revenue will take another big hit.

Meanwhile, dependency will continue to grow, eating up larger and larger chunks of the federal budget — in both relative and absolute terms.

And here are the latest details from Jason Russell:

Compared to historical averages from 1965 to 2014, spending is rising much faster than revenues. Spending is projected to rise almost 6 percentage points higher than its historical average, whereas revenue is projected to rise only 2 percentage points above average revenue.

Furthermore, revenue is not projected to rise enough to meet the historical average from 1965 to 2039, let alone the much higher spending projected in 2039.

From 1965 to 2014, federal spending averaged 20.1 percent of GDP. Revenues never once reached that level, averaging 17.4 percent of GDP over the same time period.

Tax rates weren’t constant over that time period. Whether taxes were relatively high, as in the 1960s, or low, as in the early 2000s, revenue levels were fairly constant with some swings for economic booms and busts.

In other words, we can have high tax rates and lots of loopholes resulting in collections of about 17-18% of GDP. Or we can have lower tax rates and fewer loopholes resulting in collections of about 17-18% of GDP. What we can’t have is high tax rates and no loopholes, because “selling” loopholes to the donor class is the primary reason Congress raises tax rates. Also, if you think growth sucks now, wait until we try that high rate/low loophole recipe. Money would flee the country like Grateful Dead fans during a drug raid.

The longterm solution then is to get spending in line with revenues, which would go a long way towards goosing the economy enough to grow our way out of our problems of debt and dependency.

Or we can go bust, which seems like the smart bet.