The solution Mr Obama proposed yesterday for increasing the federal budget was to raise taxes. He did not suggest taking a one-time chunk of money from those who earned it to sprinkle it among congresspersons, but instead demanded that a proportional permanent increase in taxes be levied (and that those monies be given to Congress to spend). The difference between these two modes of taxation is everything.
Here is the way the federal budget process has worked in practice—I do not say in theory, but in actuality. A projection is made of revenues (taxes). The government plans to spend all those monies and usually a little more. When the projections are accurate, the deficit grows only slowly, and in some years even decreases. These years are and have been infrequent; therefore it is rational to believe that these years will continue to be infrequent. It is irrational to believe that deficits will not continue to grow on average.
Much more often the projection is wrong. It is in error. It is overconfident. It is too sure. It says that more money will come in than actually does. This happens more frequently than do accurate projections.
The shortfall is recognized and then one or two things occurs, though both may also occur. The first is that the government “borrows” money, which increases the deficit and imperils future projections, making them less certain. The second is that taxes are raised. The argument is always, “Look, the hole is there. It can only be filled with money. If we don’t fill it now, danger looms.” This reasoning is often convincing because of the ever-nearness of elections.
Once the taxes are raised, new and higher projections are made based on the assumption that more money will flow to the government (and away from people). The budget is made on these projections; the government plans to spend all these new monies and usually a little more. When the projections are accurate…but never mind.
We are in an unbreakable loop. It ever ratchets up taxes and spending, which positively increases the power of the government. My proof is in this picture:
This is the federal per-capita outlay in constant dollars. This is how much is spent and says nothing about how much is taken in. The last year of data is 2008, the remaining years are projections from that year, and are thus way too low: in other words, the actual outlays are higher than projected. Sound familiar? (I’ll be updating this chart when I get the new data.)
The peaks due to WWI and WWII are obvious, but even more sickeningly blatant is the inexorable, probably unstoppable, upward trend. The rare times of decrease are associated with rapid economic innovation which outstrips the government’s ability to regulate; however, it always catches up. Do not forget that this chart adjusts for both an increase in population and inflation. Look carefully at the vertical-axis: it is logarithmic. The spending is increasing exponentially!
Mr Obama is suggesting that this rate of increase should not only continue, but itself increase. That is, the rate of government spending per capita should accelerate. Some of this acceleration will be to expanding existing government programs, some will be to create and fund new programs (such as the many new programs under Obamacare). The ideology that drives Mr Obama is that government is good and should be larger.
That ideology is what drove most congresses and presidents, regardless of their rhetoric. The chart above is what actually happened. There is no theory to it, no ideology. A century ago the government was spending about $150 per person. It will soon spend about $15 thousand dollars. This is an increase of 100 times.
The government, in other words, is 100 times stronger than it was a century ago. And since the government is, after all, just people, those people have 100 times the power. This power is increasing. Mr Obama would have it increase even faster.
The rich therefore will grow richer but fewer in number, and the poor poorer but will increase their number. Curiously, this necessary fact will be used as an argument that the rich should pay more, which will only serve to accelerate the trend.
I am not economist enough to tell you when the breaking point will be reached, but I can say that it must come if these trends continue.
Update A numerical example. Suppose you and the Mrs. and Becky and Billy comprise a household of 4. The government will spend $60 thousand dollars on your family. In order to balance the budget, your family would have to contribute $60K in taxes. But that means you and the Mrs. must pull down about $150 – $200 thousand, depending on the nature of your deductions.
But the median household income is about $50K. Thus, the government is spending about 3 to 4 times too much per household on average.
In his speech, Mr Obama said that “millionaires and billionaires should pay a little more.” Presumably, the president was using the Chicago definition of “billionaire”, which roughly means “Those individuals (not households) earning over $70 thousand.” Taking all—not some, all—the money from “millionaires and billionaires” (real ones, not rhetorical ones) would not be enough to fund the government. The rich can pay more than their fair share and it we would still fall short.