Balancing Budget at Current Spending Would Take Record High Taxation

By Terence P. Jeffrey | July 10, 2012 | 12:28pm EDT

President Barack Obama speaking at the Wolcott House Museum in Maumee, Ohio, on July 5, 2012. (AP Photo/Carlos Osorio)

( - Both President Barack Obama and Republican presidential candidate Mitt Romney have recently said they would like to balance the federal budget. However, according to data published by Obama’s own White House Office of Management and Budget, accomplishing that goal at anywhere near the current level of federal spending would require imposing and sustaining a record level of federal taxation as a percentage of GDP.

“I want to balance our budget,” Obama said in a July 5 speech at Sandusky, Ohio. “I want to reduce our deficit, deal with our debt, but I want to do it in a balanced, responsible way.

“I want to get America strong again," Romney said at Dewitt, Mich., on June 19. “So we can hold that torch high around the world. I'm going to do it. I'm going to put America to work. I'm going to make sure we get rid of Obamacare. That we balance our budget.”

Obama has stressed that he does not want to cut what he believes are important federal programs for everything from local school teachers to the disabled. The primary tools he cites for closing the deficit are “eliminating waste” and allowing the lower tax rates enacted under President George W. Bush to expire for the top 2 percent of American workers.

“You know, it makes no sense for us to provide me a tax cut,” Obama said in Sandusky. “I don't need it and then to cut teachers from our public schools or to cut our aid to education or to cut student loans and make them more expensive for our young people. I have had opportunities. I want to now give something back, and I think a lot of successful people out there want to give something back.

“So we'll cut programs that don't work and we'll keep eliminating waste that doesn't make, that doesn't improve prospects for the middle class,” said Obama. “But I'm not going to balance the budget on the backs of the poor or the disabled or the vulnerable, or ask middle-class families to pay higher taxes to pay for a tax cut for me or Mr. Romney. That's not how we're going to balance our budget; that's not how we're going to deal with our deficit.”

Republican presidential candidate Mitt Romney at a hardware story in Wolfeboro, N.H. on July 6, 2012. (AP Photo/Charles Dharapak)

Speaking in Wolfeboro, N.H., on July 6, Romney said he wants to cut tax rates across the board and that the economic growth spurred by those tax cuts coupled with his spending plan would balance the federal budget---in 8 to 10 years, after Romney would be constitutionally required to leave office even if he were elected to serve two terms as president.

“I want to bring down the corporate tax rate from 35 percent to 25 percent, and the individual marginal tax rate 20 percent across the board,” Romney said of his tax plan.

“Well, what I described in my plan is a series of changes to programs and eliminations of programs which save more and more money over time,” Romney said of his spending plan. “So, we're able to get America to a balanced budget in eight to 10 years, not in the first year, but eight to 10 years.”

In Romney’s 59-point economic plan, Point No. 57 is: “Cap federal spending at 20 percent of GDP.”

While 20 percent of GDP is significantly lower than federal spending has been in the past four years, it is nonetheless higher than federal tax revenues have been in any year since World War II except one.

The facts are these:

In fiscal 2009, 2010 and 2011, according to the White House Office of Management and Budget, federal spending was 25.2 percent of Gross Domestic Product (GDP), 24.1 percent of GDP, and 24.1 percent of GDP. In fiscal 2012, which will end on Sept. 30, the OMB estimates federal spending will hit 24.3 percent of GDP.

Since the Commerce Department started calculating GDP in calendar year 1929 (and fiscal year 1930), there has not been a single year that federal tax revenues have reached anywhere near 24 percent of GDP.

There have been only three years when federal tax revenues went as high as 20 percent of GDP. Those three years were 1944 and 1945, during World War II, and 2000.

In the years since fiscal 1930--the first year for which the government has published figures for federal tax revenues as a percentage of GDP--federal tax revenues have averaged 15.7 percent of GDP.

Because tax revenues remained relatively low during the 1930s--when the Great Depression occurred, when income tax withholding had not yet been enacted, and when New Deal programs such as Social Security had not yet come into force—average federal tax revenues for the years since the end of World War II are somewhat higher.  In the fiscal years since World War II, those revenues have averaged 17.8 percent of GDP.

In the post-World War II, moreover, the percentage of the nation’s wealth that the federal government has been able to pull in through taxation has remained remarkably steady.

Since 1960, it has averaged 17.94 percent of GDP. Since 1970, it has averaged 17.96 percent of GDP. And since 1980, it has averaged 17.97 percent of GDP.

Since World War II, there have been only 12 fiscal years when federal tax revenues exceeded federal spending, thus yielding a balanced federal budget. Those years were 1947, 1948, 1949, 1951, 1956, 1957, 1960, 1969, 1998, 1999, 2000, and 2001.

In those 12 post-World War II years when the federal budget was balanced, federal spending never reached as high as 20 percent of GDP. The highest spending ever went in those balanced-budget years was 1969, when it hit 19.4 percent.

In the twelve years since World War II when the federal government balanced its budget, federal tax revenues averaged 17.98 percent of GDP and federal spending averaged 16.63 percent of GDP.

If the OMB is right, and federal spending hits 24.3 percent of GDP this year, then the government will have spent an average of about 24.43 percent of GDP over the past four years. That is about 47 percent higher than the average 16.63 percent of GDP that the federal government spent in the post-Word War II years when it balanced the budget.

It is also about 36 percent than the average 17.98 percent of GDP that the federal government took in in tax revenue in the post-World War II years when it balanced the budget.

It is also about 37 percent higher than the average 17.8 percent of GDP the federal government has managed to take in in taxes in all of the years since World War II.

The bottomline: For the federal government to balance the budget at 24.4 percent of GDP spending it would have to increase federal tax revenue 37 percent above the 17.8 percent of GDP post-World War II average.

For the federal government to balance the budget at 24.4 percent of GDP it would need to raise federal tax revenues 14.3 percent above the 20.9 percent of GDP the federal government took in during fiscal 1944, in the midst of World War II, when federal revenues hit their post-1930 high water mark.

In short, balancing the budget at the current level of spending would require record taxation.

How does federal spending in this era compare to federal spending before fiscal 1930, the earliest limit of Commerce Department GDP figures?

George Mason University Law and Economics Prof. Gordon Tullock has charted federal spending as a percentage of Gross National Product going back to 1790. (GNP differs from GDP in that GNP is defined by the Commerce Department as “the market value of goods and services produced by labor and property supplied by U.S. residents regardless of where they are located,” while GDP is “the market value of goods and services produced by labor and property inside the United States, regardless of nationality.”)

Tullock’s chart shows federal spending briefly spiking to about 20 percent of GNP during the Civil War and slightly over that during World War I. (His chart also shows spending spiking above 40 percent of GNP during World War II—just as OMB's data shows spending spiking to 43.6 percent of GDP in 1943, 43.6 percent of GDP in 1944 and 41.9 percent in 1945.)

Until now, however, there has never been a period of American history when the nation was not involved in a civil or world war when federal spending was maintained above 24 percent of GDP.


Below, according to data published by OMB, is federal tax revenue and federal spending shown as a percentage of GDP for each fiscal year since 1930. These numbers show that during this period, the federal budget was balanced in 1930, and then in only 12 years after World War II: 1947, 1948, 1949, 1951, 1956, 1957, 1960, 1969, 1998, 1999, 2000, and 2001. The highest that federal spending ever reached in any year in which the federal budget was balanced was 19.4 percent of GDP in 1969. The federal budget was not balanced in any year when the federal government spent 20 percent or more of GDP.

Year             Revenue     Spending

1930            4.2             3.4

1931            3.7              4.3

1932            2.8              6.9

1933            3.5              8.0

1934            4.8              10.7

1935            5.2              9.2

1936            5.0              10.5

1937            6.1              8.6

1938            7.6              7.7

1939            7.1              10.3

1940            6.8              9.8

1941            7.6              12.0

1942            10.1             24.3

1943            13.3             43.6

1944            20.9             43.6

1945            20.4             41.9

1946            17.7             24.8

1947            16.5             14.8

1948            16.2             11.6

1949            14.5             14.3

1950            14.4             15.6

1951            16.1             14.2

1952            19.0             19.4

1953            18.7             20.4

1954            18.5             18.8

1955            16.5            17.3

1956            17.5            16.5

1957            17.7            17.0

1958            17.3             17.9

1959            16.2             18.8

1960            17.8             17.8

1961            17.8             18.4

1962            17.6             18.8

1963            17.8             18.6

1964            17.6             18.5

1965            17.0             17.2

1966            17.3             17.8

1967            18.4             19.4

1968            17.6             20.5

1969            19.7             19.4

1970            19.0             19.3

1971            17.3             19.5

1972            17.6             19.6

1973            17.6             18.7

1974            18.3             18.7

1975            17.9             21.3

1976            17.1             21.4

1977            18.0             20.7

1978            18.0             20.7

1979            18.5             20.1

1980            19.0             21.7

1981            19.6             22.2

1982            19.2             23.1

1983            17.5             23.5

1984            17.3             22.2

1985            17.7             22.8

1986            17.5             22.5

1987            18.4             21.6

1988            18.2             21.3

1989            18.4             21.2

1990            18.0             21.9

1991            17.8             22.3

1992            17.5             22.1

1993            17.5             21.4

1994            18.0             21.0

1995            18.4             20.6

1996            18.8             20.2

1997            19.2             19.5

1998            19.9             19.1

1999            19.8             18.5

2000            20.6             18.2

2001            19.5             18.2

2002            17.6             19.1

2003            16.2             19.7

2004            16.1             19.6

2005            17.3             19.9

2006            18.2             20.1

2007            18.5             19.7

2008            17.6             20.8

2009            15.1             25.2

2010            15.1             24.1

2011            15.8             24.1

2012            17.8             24.3

MRC Store