Monday, December 10, 2012

A Longer-Run Look at the U.S. Debt

An article in the most recent Federal Reserve Bank of St. Louis REVIEW by Daniel Thornton offers a long-run perspective on the U.S. Deficit and Debt Problems. It is very interesting and sheds light on what has caused the increase in debt.  Several findings are of interest:
1.   For most of our history, federal debt was associated with war, and during the time after a war, the debt/GDP fell for a number of years.
2.  The exception is the increase in debt associated with the Great Depression, but the increase in debt was not that large.
3.  The increase in annual deficits began in the early 1970s.
4.  Tax revenues as a percent of GDP stayed relatively constant but federal expenditures as a percent of GDP increased.
5.  The increases in government spending are associated with increases in Social Security and Medicare/Medicaid, and other payments to individuals.  That is, to transfer payments.
6.  The two major sources of government revenue are the individual income taxd and social security taxes.
7.  The individual income tax revenue relative to GDP has not been greatly affected by changes in the highest marginal individual income tax rate.
8.  The average individual income tax rate paid by households based on income shows that the highest quintile pays an average income tax rate about four times higher than the lowest quintile.
9.  Since 1979, the lowest income-earners have benefited the most from all the tax law changes.

Different people are likely to draw different inferences from these "facts."  Those who believe that we have to have substantial redistribution will argue that the rise in expenditures is necessary and to close the deficit, more tax revenues need to be raised from the higher-income households.  Those who believe the size of government is too large, will call for reduced expenditures.  But any future plans should at least acknowledge that historical record.

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