Tax revenue could hit $2.7 trillion, according to the Congressional Budget Office. Conservatives say this means spending cuts are the solution, but the budget numbers tell a more complicated story.
Manuel Balce Ceneta/AP
An impasse over the shape of the federal budget keeps boiling down to this basic plotline: Democrats say the solution to high deficits must include more tax revenue, while Republicans say the fundamental problem is spending.
Failure to reach a middle ground has prompted automatic spending cuts known as the “sequester” to go into effect. This wasn’t Plan A, or even Plan B, for either side.
As the politicians look for a way forward, conservative lawmakers say that new budget projections make their case for them. Federal tax revenue is forecast to hit a record $2.7 trillion this year, according to the Congressional Budget Office (CBO).
“Spending is the problem, which means cutting spending is the solution. It’s that simple,” said Rep. Cathy McMorris Rodgers of Washington State on Saturday, as she gave congressional Republicans’ weekly address to the nation. She cited the CBO forecast of record revenues.
Not so fast. The budget numbers tell a more complicated story – one that makes fiscal politics difficult for both parties.
Yes, if $2.7 trillion in revenue materializes this year, that would set a record. It would surpass the prior peak of $2.6 trillion, set back in fiscal year 2007 before the recession began.
But that doesn’t mean federal tax receipts are fully back to normal.
Economists generally compare taxes and spending to the size of overall economy. That’s because demands on government often increase as the economy grows and population rises. And the value of tax receipts needs to be adjusted for inflation, to give a real sense of purchasing power.
Tax revenue will total 16.9 percent of gross domestic product this year, the CBO predicts, compared with 18.5 percent of GDP in 2007. It looks as if it will take another year, until 2014, for tax revenue to get back to 18 percent of GDP, which has been the average level since 1973.
But here’s the big issue: There’s no level of tax revenue or federal spending that’s automatically the “right” level. Yesterday’s averages don’t tell us what tomorrow’s should be.