The 21% Limit

I was recently engaged in an intense conversation with a dear friend. She, an ardent Obama supporter, insisted that the Bush tax cuts are to blame for our exploding national debt. Our conversation was interrupted by more important things, but it got me thinking about how best to illustrate the basic problem with her argument.

The Office of Management and Budget (OMB) - a part of the President's team - publishes the percentage of GDP that the federal government takes in each fiscal year. It's helpful to understand what actually happened, rather than an estimate of might happen in the future, or a prediction of how this policy or that policy will affect things. The chart below is based on the OMB's publicly published numbers showing tax receipts since 1945.

What does history tell us? It tells us that, regardless of tax rates, the federal government takes never takes in more than 21% of GDP. This is nearly 70 years of consistent behavior. It is a modern era that includes years of war and of peace. It includes recessions, recoveries, housing booms, oil crises and even the collapse of the gold standard. It is a period of dramatic technological and economic change. In these years, marginal tax rates were as high as 90%. In some of these years, taxes on high incomes and successful investments were exceptionally high; in others they were exceptionally low.

Through it all, tax receipts never went above 21% of GDP. That tells me that our federal government must not spend more than 21% of GDP. We must prioritize that spending so that we fund that which is most important. And we will likely disagree amongst ourselves on those priorities. But the fundamental fact is that we will never tax ourselves back to a balanced budget. The only way is to recognize that federal spending has an indisputable limit.

Source of tax receipt data: The Office of Management and Budget