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The U.S. Tax-Income Ratio

August 17, 2017 1 comment

I recently saw a news report about federal government tax receipts and I began to wonder what trends, if any, have been present in the public’s support of government as measured by its tax payments. Most media reports that I have seen focus on the dollar amounts of federal government tax revenue but it is more informative to include state and local governments as well so that we can get a more accurate measure of public tax payments to the government.

But rather than looking at tax payments in dollars, it is more useful to look at tax shares of our incomes. The economy grows over time and so it is more informative to see what fraction of our incomes are paid to the government so that we can adjust for the size of the economy as it changes through time. For this post, I will use Gross Domestic Product (GDP) as a measure of our incomes and I will use Federal plus State and Local receipts to capture the revenues of all sorts that flow to the government. All of the data was drawn from the St. Louis Federal Reserve Bank FRED database which is freely available to the public. The data is annual and it covers 1929 through 2016. Read more…

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The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Dismal Economic Growth Continues

The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.

The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates).  Below is a table listing annual growth rates for real output (GDP) since the last recession ended.

Quarter Growth Rate
2009:3 1.3
2009:4 3.9
2010:1 1.7
2010:2 3.9
2010:3 2.7
2010:4 2.5
2011:1 -1.5
2011:2 2.9
2011:3 0.8
2011:4 4.6
2012:1 2.7
2012:2 1.9
2012:3 0.5
2012:4 0.1
2013:1 1.9
2013:2 1.1
2013:3 3.0
2013:4 3.8
2014:1 -0.9
2014:2 4.6
2014:3 4.3
2014:4 2.1
2015:1 0.6
2015:2 3.9
2015:3 2.0
2015:4 1.4
2016:1 0.5

The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.

The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.

Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.

The 2008 Financial Crisis Revisited

January 8, 2016 1 comment

A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.

Peter Wallison is on the staff of the American Enterprise Institute.  He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.

I have also written previously on the crisis (read those posts here and here).  All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.

Greece

February 20, 2015 Leave a comment

Greece has a newly-elected government which campaigned on the promise that, if elected, it would renegotiate the bailout terms that previously were imposed upon the Greek economy by a previous government and its financial bailout partners. The reason for the desire to renegotiate terms is that Greece has been in recession with high unemployment and declining output for some time and the terms of the bailout require higher taxes and reduced spending, among other things, as a requirement for loans to keep the government from defaulting on its debt.  This drama seems to me to offer a number of lessons for the U.S. and other countries running persistent government deficits.

The Fallacy of Composition

Economists know that what is true for an individual in an economy is not necessarily true in the aggregate economy.  This fact is known as the Fallacy of Composition.  So if Greek politicians promise transfer payments to some Greek citizens, this does not imply that those politicians can promise such payments to all citizens.  Once you add up all the promises, one needs to ask how this will be financed and in many countries, such as the U.S., the answer is borrowing to keep these promises. Each individual wants what he or she has been promised but, if a government is unable to borrow, then what is true at the individual level cannot be true in the aggregate. Greece cannot keep all of the promises that it has made because it will not be able to continuously borrow to do so.

Greece and the EU

Greece is a member of the EU and so it cannot print money to cover its deficits if it is unable to borrow.  The reason is that Greece does not control the EU Central Bank.  If it did control its own money stock, it would undoubtedly be in the throes of a hyperinflation because it would be printing money to finance its deficits. Since it cannot print money, it sought loans to keep the party going but reduced spending and higher taxes were the price it paid for its bailout. The recession resulting from these terms are what has prompted the desire to renege on its previous agreement.

Ultimately, structural reforms are needed to promote economic growth, much like those discussed previously in this blog in connection with Italy which has problems similar to Greece (see Why Italy Declines). These reforms are so-called supply-side policies that remove regulatory and other impediments that reduce economic growth. These reforms appear not to be part of the bailout requirements but these reforms are the only way that the Greeks can achieve real economic progress.

Economic Growth Since the Last Recession

June 9, 2014 3 comments

First quarter 2014 economic growth was recently revised downward to -1.0 percent. The media response seemed to focus entirely on the effects of seasonality, with the argument that negative real growth was caused by the harsh winter that recently ended. This seasonality story obviously has some truth to it but the more compelling data is not one single data point for real growth. It is much more important to examine the trend in real growth because this is much more revealing about future living standards in the United States.

The last U.S. recession ended in June 2009 (got to nber.org for business cycle dates). In the table below, there is data on real economic growth at quarterly annualized rates taken from the government agency that reports NIPA (National Income and Product Accounts) data, bea.gov. The table suggests a pattern that should be a concern for all members of society. Read more…

Tax Rates and the The Fiscal Cliff

November 26, 2012 2 comments

The public has been deluged with reporting about the “fiscal cliff” and I admit to some concerns about my contributing to this barrage of information. But while there has been, as usual, lots of reporting about the business cycle effects of the fiscal cliff, I have seen little systematic analysis of exactly what will happen without action by the federal government.

The Tax Policy Center of the Urban Institute and the Brookings Institution has provided what appears to me to be the most thorough analysis of what will happen to tax rates if the federal government does not act. The complete analysis is Toppling-off-the-fiscal-cliff but this is likely to be overkill for most readers. To simplify, I have extracted Tax-Tables-Toppling-off-the-Fiscal-Cliff from the report so that readers can see the effect of federal inaction on personal income tax rates. You will note that nearly every tax bracket will rise by about ten percent. And note that these are marginal tax rates which are the tax rates that affect economic incentives. Thus the returns to saving, investment, and labor supply will go down for nearly every taxpayer.

In addition, the Tax Policy Center report notes that there will be additional tax increases associated with estate taxes, Social Security, the Alternative Minimum Tax, and Obamacare (and this is not an exhaustive list of all tax increases that will occur) so that 90 percent of all taxpayers will see an increase of some sort in their tax bills. What will be the consequences of these increase in tax rates? There will likely be a recession next year and real output will fall permanently (see my previous post on this subject). But there is a larger issue underlying all of this.

The President has stressed raising tax rates on the rich. There are estimates in the media that he wants an increase in tax rates that would generate about $80 Billion in additional tax revenue. In the first month of the federal government’s fiscal year, the federal government deficit was $120 Billion. So even if the tax revenue forecast is accurate (and it is almost certainly an overestimate), the tax increases favored by the President will not cover even one month of the federal government’s deficit. This illustrates the magnitude of the financial problems that we face as a nation.

The public must realize that, without entitlement reform, the entitlements promised by the federal government will require higher tax payments by all taxpayers if we are to avoid insolvency. It is simply delusional to think that a tax increase on the rich will solve our financial problems. Is the public ready to pay more? Your guess is as good as mine.

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