Fiscal Policy Update: Revenue Still Strong

by: Calafia Beach Pundit

Fiscal policy is far from ideal, but there are some things that are moving in a positive direction. Our tax code needs to be drastically simplified, tax rates need to be lowered and flattened, and entitlement programs need profound restructuring. There's a lot to look forward to if Congress ever gets its act together. In the meantime, it is encouraging to see that federal spending has shrunk significantly relative to GDP, and federal revenues continue to march higher relative to GDP - thanks mainly to rising profits, expanding jobs, and increasing incomes.

The current recovery is the only one in history to occur alongside zero growth in federal spending. Federal revenues, in contrast, have been rising steadily, something that is fairly typical of recoveries. Spending has not increased at all for the past five years, but revenues have climbed by almost $1 trillion.

Spending as a % of GDP is back down to just over 20%, close to the average of the past several decades. Tax revenues are still shy of their long-term average, but they continue to rise relative to GDP. In the past year, federal revenues have posted growth of 8.6%, and they have grown at an annualized rate of 8.6% for the past four years.

Strong revenue growth in recent months is a good sign that the economy is nowhere near recession, as the -2.8% Q1/14 real GDP growth seemed to suggest. A weak economy simply does not generate this kind of growth in tax revenues. Corporate tax receipts have surged at a 15.7% annualized rate in the past four years. Think how much more they might increase if the corporate tax rate were slashed and trillions of overseas corporate profits were repatriated! As it is, corporate tax receipts totaled only $303 billion in the past 12 months, representing just 10.3% of total federal revenues. We ought to all but eliminate the corporate profits tax, since that would provide a much-needed incentive for more business investment and negative impact on the federal deficit could be recouped handsomely by the expanding jobs and incomes that would flow from increased investment.

The federal deficit has collapsed in the past four years, having fallen from over 10% of GDP to now just 3% of GDP. In dollar terms it has declined by almost two-thirds. Nobody expected this to happen back in 2009 and 2010. We were supposedly facing trillion-dollar deficits for as far as the eye could see. This is a very welcome development.