Rational Action

Brad DeLong channels Krugman on really problematic government deficits
The linked entry refers to the government without taking into account Social Security. Since Social Security is presently balanced, removing it from deficit calculations reveals a huge shortfall in the “general fund” (government minus social security). Think about this - the government only takes in 70 dollars for every 100 that it spends. To close the gap the government will need to collect about 40% more than it already does.

This is troubling, no? The U.S. government runs a deficit of around 4% of GDP (a measure of the size of an economy), which is comparable to that of some other big countries (Germany, France). But in Germany, government represents fully half of the country’s economy; in the U.S., government takes up only around a fifth. We tend to measure deficit relative to the size of the country’s economy, not relative to the size of the government. Measuring this way makes a 4% American deficit seem close to a 4% German deficit.

However, when you want to know how much taxation will have to change to cover government shortfall, it’s important to consider the current size of the government. When an entity that takes up fully half of the economy runs a 4% deficit relative to the size of the whole economy, as a single entity, it would have to raise taxes by a bit more than 8% to magically plug the shortfall. (deficit / current revenues)

The U.S. government, only taking up 1/5 of the economy, needs to close a 4% shortfall relative to 5/5 of the economy. When you end up dividing the current deficit by current revenue, the number is a ghastly 23%. (That number is smaller than the 40% from before, since we’re now including the currently balanced social security system.)

In sum: taxes on the whole would have to increase a whopping 23% (pay $1.23 for every $1 you pay right now to the federal government) to stop this year’s debt hemorrhage. For the moment, we’re getting a sweet deal. But this is all going to have to be paid back with interest. Enjoy the tax cuts while you can.

(Notes: Thank you CBO. Astute readers feel free to point out horrendous mathematical errors.)

This entry was posted on Friday, December 10th, 2004 at 3:45 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.