Tax policy in the United States is in a current state of confusion. For there to be coherent US tax policy there must be a level of agreed upon government spending. During the period of 1998 to 2009 state revenue was on the decline since tax policy law is latent. As the shift of retail sales became more prevalent on the internet state sales tax revenue declined. As of 2019 many states now tax online internet sales; this enactment has decreased state budget deficits or led to state budget surpluses from 2010 to 2019. In the early 1970’s the administration enacted revenue sharing laws for all states with the Federal government. The revenue sharing program contributed to state shortfalls in revenue during the 1998 to 2009 period, although this is not the only reason for decreased tax receipts as a percentage of GDP in nominal terms.
At the present time state sales tax revenue has recovered. However, budget deficits remain at the Federal level due to multiple tax cuts without the proper spending cuts. It appears that society does not want a reduction in the level of government spending. As a result of the tax reductions we are left with soaring deficits. If society deems the level of government should be where it currently is at, then tax cuts do not make for good tax policy unless spending is reduced. The last time the Federal budget was balanced was in the latter half of the 1990’s. It does appear that government spending must be in a relevant range of around $3.25 trillion dollars per fiscal year. Current tax revenue is around $3.25 trillion dollars per year. Although current spending is $3.25 trillion plus the $1.0 trillion deficit, or $4.25 trillion. However, there seems to be no way to cut $1 trillion from domestic spending. Keep in mind that we are running $1 trillion-dollar deficits in 2019/2020. Also, note that social security and Medicare do not contribute to the Federal deficit because they are self-funded and not included in domestic spending; never mind the fact that the OASDI program is not taking in enough money to cover outlays in the out years, that is a separate issue. As per the data published by the Bureau of Economic Analysis the average historical percentage of GDP for tax receipts is about 17.5%.
Until there is the political will, trust and understanding among the Executive and Legislative branches of government the budget will not be balanced. Consequently, there is a point where our currency value, interest rates and foreign and domestic policy will no longer serve the constituency; folks we are there now! In conclusion, voters must educate themselves on this important matter, otherwise we will all suffer the consequences; not to mention the suffering that lies ahead for our children. Below is my analysis of the numbers taken from the Bureau of Economic Analysis www.bea.gov
2018 Tax Revenue $3.25 Trillion.
2018 GDP $20.580 Trillion
Percentage of tax revenue to GDP: 3.25/20.58 = 15.79% of GDP
2018 Tax revenue $3.25 Trillion
2019 Budget Deficit $1 Trillion
Tax Receipts plus deficit is the current collection needed ($1 plus $3.25=$4.25), so $4.25/$20.58 = 20.7% receipts required as a percentage of GDP. The current deficit is $1/$20.58 = 4.6% of GDP. This is too high for our economy since we are running a deficit. Conclusion: 15.79% may be too low and 20.7% too high for tax revenue as a percentage of GDP. If the optimum tax revenue is approximately 17.5% of GDP for an acceptable level of government in historical context, then we need some combination of spending cuts and tax increases.
Source: Bureau of Economic Analysis: https://www.bea.gov/
By Jeffrey Waks, Accountant and Financial Analyst
October 8, 2018