Moody’s is just the latest credit rating agency to sound the alarm on America’s $36 trillion spending problem. Listening to politicians and pundits, no one would ever think the U.S. has a massive spending addiction that is catapulting the country toward a fiscal crisis. Too many seem to think that raising taxes is the key to reducing deficits, lowering inequality, improving healthcare, or really anything else. Democrats have branded Republican efforts to keep taxes from going up on more than 60 percent of tax filers “the most fiscally irresponsible [move] in America’s history” and slammed “harsh cuts to programs Americans depend on the most.”
While GOP proposals thus far are far from perfect, keeping tax rates at current levels is not the crux of America’s fiscal woes. The truth is that spending is historically high, while tax collection is in line with historical averages. The Trump administration and lawmakers must work together to end Washington’s relish with red ink.
There’s simply no evidence that America’s tax rates are bleeding Washington, D.C. dry. Compiled by the Federal Reserve Bank of St. Louis, the evidence going back nearly a century is available for all to see. In the seven (full) years since the 2017 Tax Cuts and Jobs Act (TCJA), the federal government’s revenue collections have totaled about 16.7 percent of national wealth—measured through Gross Domestic Product (GDP). For context, the twenty years before the 2017 tax cuts saw average revenues at just under 17 percent of GDP. That was when U.S. corporate tax rates were the highest in the world, and small businesses often had their “pass-through” income taxed at high (individual) marginal rates. Yet, for all the high costs and low growth caused by these sky-high rates, the change in revenue after the tax cuts is barely a blip on the radar.
Interestingly, the federal government is collecting more money in the post-2017 tax cut era than it did in the 1951–1963 period, when top individual tax rates hovered between 91 percent and 92 percent. Not surprisingly, “the existence of the 91 percent bracket did not necessarily lead to significantly higher revenue collections from the top 1 percent [because] the existence of a 91 percent bracket led to significant tax avoidance and lower reported income.” And, current tax revenues as a proportion of national wealth are right on par with the eight-decade post-World War II average of 16.8 percent. That is true despite (mostly) higher taxes throughout that era than exist today. There’s just not much evidence that high taxes can keep revenues high or deficits at bay.
On the other hand, overspending reliably drives debts and deficits. Since fiscal year (FY) 2015, federal outlays have increased by an astounding 83 percent. Net federal spending is now more than 23 percent of GDP, compared to the post-WWII average of 19.4 percent. And, according to the Congressional Budget Office, the situation will only get worse. Even assuming robust revenue growth, the federal deficit will approach $3 trillion by 2035 unless spending is brought under control.
The good news is there are plenty of steps policymakers can take to wipe away the red ink. Gargantuan spending items such as the Department of Defense (DoD), Medicare, and Medicaid offer some of the largest savings’ opportunities. For example, Medicaid currently spends about $9,000 per year (or $750 per month) per beneficiary. And, even that large sum doesn’t account for more than $100 billion in annual program overhead costs. If Medicaid dollars were given directly to beneficiaries to spend on mid-tier private health insurance plans (which typically cost $500 per month), taxpayers could save at least $200 billion per year. And, Medicaid recipients would have private insurance, which is typically far better than Medicaid.
Meanwhile, the DoD is plagued by mission creep and cost overruns. As Taxpayers Protection Alliance Vice President of Policy and Government Affairs Dan Savickas notes, “The F-35 [fighter jet program] has been a taxpayer-funded boondoggle for decades. The price tag is approaching $2 trillion. ... Not only are the estimates not what was advertised, but the performance of the F-35 jets also failed to meet expectations. ... [The Pentagon] found that the F-35 fleet can perform its full range of combat roles only 30% of the time. Seven times out of 10, the F-35 cannot do what it is supposed to. This is unacceptable, yet the government continues to accept it.” Scrapping or scaling back wasteful weapons programs could save taxpayers trillions of dollars over the lifetime of these programs.
There is plenty that lawmakers can do to reduce the debt and deficit. But, unless they focus on overspending, they won’t make a dent in dollars or cents. Washington, D.C. must rethink how it spends taxpayers’ hard-earned money.
Ross Marchand is a senior fellow for the Taxpayers Protection Alliance.