The “taxing vs. spending” debate continues in Washington and will do so right through the November election. On one side are those who promote that spending must be slashed to the bone with no tax increases; at the other extreme are those arguing for huge tax increases for the wealthy. This chart is our attempt to put government spending and taxes into a historical context over the past 65 years.
Chart courtesy of Ned Davis Research
When looking at the deficit, our national debt, and the projected entitlement spending for the Baby Boomers, it is hard to make the math work without higher revenues along with reduced spending. Taxes are currently running at 17.1% of GDP (blue line), which is below the historical mean of 18%. The Simpson-Bowles deficit commission argued that we could raise considerable revenues by eliminating most deductions and still cut tax rates. We like this kind of reform because Uncle Sam can both raise revenues AND raise the incentive to produce.
President Obama says the wealthy need to pay their fair share, and something is obviously wrong with the system when Warren Buffett is in a lower tax bracket than his secretary. But the term “wealthy” is a relative term. The top 10% of wage earners in the U.S. already pay 70% of all federal income taxes, so what is their “fair share?” Even more disconcerting is that 48% of workers pay no federal income tax at all. In his State of the Union address earlier this year, President Obama said, “it’s time to apply the same rules from top to bottom.” It’s true that wealthy Americans should pay their fair share, but everyone above the poverty level needs to contribute.
Equally as important, if not more – is that government spending has exploded to 25.5% of our economy (black line). This is due, in part, to cyclical weakness and stimulus spending; but compare 25.5% to the 65-year norm of only 19.6%. The bipartisan deficit commission argued that spending should be reduced to 21% of GDP. That should be our minimum goal. We have to seriously cut government spending and we need to do it now.
If we can get our debt situation under control over the next few years, we believe another secular bull market is a distinct possibility. -Stacey Wall