Federal taxes in fiscal year 2009 claimed the smallest share of GDP since 1950—14.9 percent according to the Congressional Budget Office (see top figure). The revenue drop has many causes: tax reductions in this year’s economic stimulus, the collapse of the economy, and the Bush tax cuts from earlier in the decade.
Revenues will rebound to higher levels over the next few years but how high they will go depends on what happens to tax policy. If Congress does nothing and current tax law plays out over the coming decade, revenues will jump in 2011 when most of the Bush tax cuts expire and the alternative minimum tax (AMT) hits more and more victims. By 2019, again according to CBO, taxes would claim 20 percent of GDP, well above the 1961-2008 average of 18.2 percent (see bottom figure).
The Obama administration asserts a different revenue baseline from current law. It would make the Bush tax cuts permanent, set the estate tax at 2009 levels (indexed for inflation), and permanently patch the AMT. Those changes would substantially reduce future revenues, leaving taxes at 18.0 percent of GDP in 2019, slightly below the long-run average.
In its 2010 budget, the administration proposes to raise taxes on high-income taxpayers by taking back the Bush tax cuts granted in its baseline and limiting the value of itemized deductions. Those actions would lift federal revenues starting in 2011 and boost 2019 taxes to 18.8 percent of GDP, a little more than the long-run average.
Strictly in terms of taxes, there’s nothing particularly right or wrong with any of the three future scenarios. Whether we’re above or below our 50-year average has no evaluative importance. What does matter, however, is that all three revenue paths fall far short of the 23.6 percent of GDP that CBO projects the government will spend in 2019. Maybe Congress and the president—and his successors—will manage to cut one-fifth of projected expenditures over the coming decade and balance the federal budget, but that’s a very tall order in the face of baby boomer retirements and soaring health costs. Reaching fiscal balance will take some combination of spending cuts and tax increases. What we don’t need is more tax cuts.