Economics

Krugman's "23 Percent Solution" & Historical Levels of Government Revenue

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If you identify as libertarian (and I do like to use it as an adjective more than as a noun), you get used to people saying you're crazy or that your ideas are simply unworkable in the real world.

Which brings me to New York Times columnist Paul Krugman, the Nobel-winning economist who rarely misses a chance to get in such a dig at libertarians and who has recently unveiled a "23 Percent Solution" for the nation's budget woes.

The Top 100 scientist or thinker (source: Time!) proclaims that "America is a low-tax country by international standards" and cites a graphic showing that. According to the table, the U.S.'s total receipts of government at all levels as a percentage of GDP came to a bit over 30 percent. The average for the major OECD nations (a stand-in for the developed world) came to around 36 percent and four countries (Norway, Denmark, Sweden, and Finland) came in over 50 percent.

Krugman was calling up such data to chide his Times colleague Ross Douthat, who is worried about federal taxes rising to 23 percent of GDP, which happens to be what is would take to pay for President Obama's proposed budget plan. Krugman adds to his empirical observation, "You may not approve of a shift that moves America closer to the OECD norm, but that's not the same thing as saying that it would be inconceivable or disastrous." (Full Krugman here.)

Let's leave aside whether increasing the federal tax burden that much would be "disastrous" and ask whether it is inconceivable. Which depends on your definition of the term. Since 1950, total federal revenues have averaged a hair under 18 percent of GDP. So going to 23 percent from the historical average would mean increasing the federal burden by 28 percent. Since 1950, total federal receipts as a percentage of GDP (table 1.2) have been higher than even 20 percent precisely once: in 2000, when they reached 20.6 percent. You need to go back to 1944 and 1945 to crack the 20 percent level. And even that doesn't get you within shouting distance of 23 percent

Between 1950 and now, we have had presidents and congressfolks who have tried their damnedest to jack revenue through top marginal income tax rates as high as 92 percent (and as low as 28 percent), all sorts of tariffs and levies and temporary surcharges and parking fees at National Parks and you name it. Why, we've even got a federal corporate tax rate so high (35 percent) compared to other OECD countries that the Obama administration wants to cut it. But none of that has worked to increase revenue anywhere near 23 percent, or even far north of 18 percent.

My point is directed at fellow libertarians and is simply this: The next time somebody tells them that our ideas are all nice and interesting and provocative but come on, pally, they just can't work in the real world, respond by pointing to the flights of fancy demonstrated by Paul Krugman and others like him. They blithely assert, against all historical evidence and typically without outlining exactly how they are going to squeeze massive new revenues out of taxpayers that all we need to do to bring fiscal sanity to Washington is twist the tax dial upwards. You can even grant that it's not inconceivable, just highly improbable.

And then point your conversation partner to the "The 19 Percent Solution," by me and Veronique de Rugy, which lays out how to balance the federal budget by 2020 by keeping total outlays at 19 percent or less of GDP. That figure is not pulled out of a hat - it's what the Congressional Budget Office's "alternative scenario" (prized for its realism) has estimated revenue will be 10 years out if current tax levels are maintained. It's a bit higher than the historical average but is within the bounds of reality. And the cuts that would need to take place over the next 10 budgets to bring outlays from 25 percent of GDP to 19 percent are not in any way, shape, or form draconian. Unless you consider the federal government spending more in 2020 than it did in 2000 (when outlays equaled 18 percent of GDP) a real problem.

Here's a chart that shows just how damned workable The 19 Percent Solution is:

For more on budget fantasies and workable plans to reduce spending, go here.