Fiscal Policy

Spending, Tax, and Deficit Myths Exposed

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A quick look at economic data disproves numerous talking points.

The public debate on taxes, spending, and deficits consists mostly of lazy conventional wisdom that is largely incorrect. While detailed historical data on spending and taxes can be found at the Office of Management and Budget (OMB) website, and the 10-year and 30-year budget projections are available from the Congressional Budget Office (CBO), many lawmakers, reporters, and (especially) social-media activists regularly repeat talking points that can be easily disproved by spending just a few minutes on these websites.

Thus, I have authored a 100-page book of charts that summarizes America’s spending, tax, and deficit situation and refutes the popular myths that will not go away. Every chart is sourced with widely available government data. The most common myths are summarized below:

Myth: Soaring Defense Spending Drives Deficits

While it is easy to fixate on the occasional large defense bills, the general trend has been declining defense spending as a share of the economy. Defense spending averaged 5.7 percent of GDP in the 1970s and 1980s, and was still 4.6 percent of GDP as late as 2010. It has since fallen to 3.2 percent of GDP and is projected to continue falling to 2.9 percent in a decade – matching its smallest share of the economy since the 1930s, and not far above the 2 percent of GDP target for our NATO allies. Since 2017, defense has comprised a record low of 15 percent of federal spending. In fact, since 1990, non-defense discretionary spending has risen nearly four times as fast as the defense budget (adjusted for inflation).

Myth: Falling Tax Revenues Drive Long-Term Deficits

Since 1960, tax revenues have remained close to their 17.3 percent of GDP annual average. While tax cuts and the current recession have reduced revenues to 16.6 percent of GDP, they are projected by CBO to gradually rise to 18.6 percent over the next three decades (or 17.8 percent if all 2017 tax cuts are made permanent). This is because real bracket creep — wages growing faster than inflation — pushes families into higher marginal tax brackets over time.

Myth: The 2017 Tax Cuts Drive the Deficits

Yes, the tax cuts reduced revenues relative to the earlier baseline (and much of the subsequent nominal growth in revenues comes from inflation, population growth, and real bracket creep). But even if the tax cuts are renewed, their $200 billion annual cost cannot explain more than a fraction of the budget deficit’s expansion from $600 billion to $2 trillion between 2016 and 2030. The real deficit driver is the annual general-revenue transfers needed to pay all Social Security and Medicare benefits (including debt-interest costs) rising from $350 billion to $1.5 trillion over that period.

Myth: Social Security and Medicare Do Not Drive Long-Term Deficits

The CBO projects $104 trillion in budget deficits over the next 30 years. Because Social Security and Medicare payroll taxes and premiums are insufficient to fund full benefits, these two systems will run a shortfall of $101 trillion ($62 trillion for benefits plus $39 trillion in resulting interest on the debt). The rest of the budget will run a deficit of just $3 trillion over the next three decades. In fact, by 2050, the Social Security and Medicare systems will be running an annual cash shortfall of 14.2 percent of GDP (including interest), while the rest of the budget will enjoy a 1.5 percent of GDP surplus.

Myth: Social Security Does Not Add to Deficits

Over the next 30 years, the Social Security system will collect $52 trillion in payroll taxes and other non-interest dedicated revenues and spend $74 trillion on benefits. The resulting $22 trillion deficit must be financed by outside revenues or borrowing. And even saving the entire $3 trillion Social Security Trust Fund would have still left a $19 trillion shortfall.

Myth: The Safety Net is Shrinking

Total federal spending on means-tested health, food, housing, cash, and other assistance has risen every decade since the Great Society was enacted — and regardless of which party controlled Washington — from 1.4 percent of GDP (1970s), to 1.9 percent (1980s), 2.6 percent (1990s), 3.0 percent (2000s), and 3.9 percent (2010s) before surpassing 4.0 percent of GDP this year. Health care and cash assistance drive most of the increase, although SNAP saw a 106 percent increase in caseloads and 136 percent hike in inflation-adjusted spending between 2001 and 2019, despite the number of individuals in poverty rising by just 3 percent.

Myth: Bill Clinton and Newt Gingrich’s Courageous Reforms Balanced the Budget in the 1990s

Deficit reduction did indeed create historic budget surpluses between 1998 and 2001, but Clinton and Gingrich had little to do with them. Of the 6.8 percent of GDP improvement in the fiscal balance between 1992’s peak deficit and 2000’s peak surplus, roughly 5.6 percent of GDP came from continued defense savings after the Cold War ended, and the late-1990s economic bubble that temporarily produced higher tax revenues. President Clinton’s 1993 tax increases and later GOP spending cuts saved the final 1.2 percent of GDP. The bursting of the economic bubble and the 9/11 attacks reversed the two main savings sources and contributed (along with tax cuts) to deficits returning in 2002.

Myth: President Obama Aggressively Cut Deficits

Yes, the budget deficit fell from its 2009 peak, but President Obama’s policies actually slowed down the naturally occurring deficit reduction. Between 2007 and President Obama’s inauguration day in January 2009, the effects of the Great Recession had increased the annual budget deficit from $161 billion to (a projected) $1.2 trillion. At that time, the CBO forecast that if Washington did nothing, the recession would end in the middle of 2009 and deficits would automatically fall back to $260 billion by 2012. Instead, all legislation signed by President Obama cumulatively added $5 trillion in ten-year deficits on top of that original January 2009 baseline. The deficit increased to $1.4 trillion by the end of 2009, remained over $1 trillion annually through 2012, and never fell below $438 billion during the Obama presidency. Interestingly, the weaker-than-expected economic recovery did not drive the continued $1 trillion deficits, as Washington saved more in interest costs from low interest rates than it lost in tax revenues during the recovery period.

Myth: The Top Tax Rates Determine Tax Revenues

From the 1950s through the 1970s, the top marginal income tax rate remained between 70 percent and 91 percent — and federal income tax revenues averaged 7.6 percent of GDP. Since the 1980s, the top tax rate fell to 28 percent and then bumped up to the 30s — with income tax revenues averaging 8.0 percent of GDP. In fact, there has been a negative overall correlation between the highest income- and capital-gains-tax brackets and the revenues those taxes collect. The point is not that cutting tax rates automatically raises tax revenues, but rather that the top tax rate often matters less than tax preferences, incentives for tax avoidance and evasion, the tax rates and income thresholds in lower brackets, and overall economic performance.

Myth: The U.S. Corporate Tax Rate has Been Cut Far Below Those of Our Competitors

Since 2000, the average corporate tax rate for OECD nations has fallen from 32 percent to 23 percent. America’s 39 percent rate (including state taxes) was the OECD’s highest until the 2017 tax cut reduced the rate to 26 percent (again, including 5 percent state taxes). Overall, the U.S. corporate tax rate remains the 11th highest of the 37 OECD nations.

Myth: The Federal Tax Code Is Becoming Less Progressive

The CBO reports that the highest-earning one-fifth of households now pay 87 percent of all federal income taxes, and 69 percent of all combined federal taxes — both well above the levels of 40 years ago. Combining all federal taxes, the highest-earning 1 percent of households pays a 32 percent overall tax rate, while the top-earning one-fifth pays a 26 percent overall tax rate (roughly the same as 40 years ago), while average tax rates for the remaining 80 percent of taxpayers have plummeted. Even after adjusting for their increasing share of the income earned, the highest-earning 1 percent and 20 percent of households each shoulder more of the federal tax burden than they had in 1980. The U.S. maintains the most progressive tax system in the OECD.

The chart book refutes these and many more budget, tax, and deficit myths. It also adds up the cost of popular Democratic spending proposals and shows why their accompanying tax hikes could not possibly finance them. The book is available here.

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