Monday, May 23, 2005

WSJ Leaps to Conclusions

The Wall Street Journal leaped at the opportunity to extoll the incredible increase of tax revenue for the first seven months of the fiscal year, with the predictable conclusion that the revenue was increasing because of tax cuts; to keep the revenue increasing, we have to make the tax cuts permanent; and the big problem is that the government spends too much.

To get some historical perspective on this unusual "first seven months of the fiscal year" snapshot, you can find data here .

From this, we can glean that the first seven months of FY 2005 brought in more revenue than the first seven months of FY 2000, just barely. Hallelujah! Of course, it was still 36 Billion less than the comparable seven month period in FY 2001, when the government brought in 1.25 Trillion of revenue and ran a $165 Billion surplus instead of the $237 Billion deficit run during the first seven months of FY 2005. But what the heck.

A broader historical perspective can be gleaned by comparing the change of revenue for the past five years with other five year gains. There, we find that revenues increased 48% between 1995 and 2000; 32% between 1990 and 1995; and 37% from 1985 to 1990. That's compared with the 3% gain from 2000 through 2005.

For the most part, tax revenue gains follow GDP gains over longer timeframes, historically. For example, nominal GDP grew by 37% from 1985 to 1990, exactly matching the 37% increase in tax revenues. From year to year, tax gains are more volatile, following the business cycle.

So, it isn't particularly suprising for tax revenues to increase by 11% from year to year during a rebound in the business cycle, as we've seen in the past year.

It is rather unique, though, to have a five year period when GDP increases by 26%, while tax revenue only increases by 3.7%. Now, the 26% nominal GDP increase for the past five years is pretty small, compared with other recent five year periods. But having federal tax revenue roughly flat - in nominal dollars - for a five year period - is way off the charts.

So, before we leap to a conclusion based on the new 7-months-out-of-a-fiscal-year accounting standards, perhaps we should remember that the federal government is still spending a few hundred Billion a year beyond what it brings in, and that is above and beyond the Social Security surplus, which is also being spent to cover general obligations. It's great to see federal revenue creeping up above the 17% of GDP mark, but that's still 17% short of matching spending, and that's for the easy seven month fraction of the fiscal year ending in April, and with a Social Security surplus of a couple points of GDP.

It's really time to start adjusting tax revenue so we'll bring in something closer to what we spend without having to goose general revenues with a big Social Security surplus. If the government can't come close to breaking even now, near the peak of a business cycle and with near-peak Social Security surplusses, it's time for a change of leadership.


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