Tax revenue soaring, spending still in La-La Land


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Deficit spending was off the charts during the Covid pandemic, and it’s finally starting to come back down to earth. Biden indeed oversaw the largest federal deficit reduction in history, but the deficit is still in la-la land despite a precipitous fall. What saves the day is a massive increase in income tax revenues fueled by a recovering economy, high inflation and soaring stock prices.

Chart #1

Federal government finances

Federal government finances (Author)

Chart #1 shows the 12 months. moving sum of federal expenditures and revenues, plotted on a logarithmic scale to emphasize rates of change (i.e., straight lines reflect a constant rate of growth). Revenues have jumped and spending has fallen from shockingly high levels, but spending is still miles from what would once have been considered “normal”.

Graph #2

Federal revenue

Federal revenue (Author)

Chart 2 shows the composition of federal tax revenues. All sources of revenue have improved, but personal income taxes account for the lion’s share of the federal tax improvement. This in turn has been driven by a huge recovery in the number of people working, rising incomes, inflation and soaring stock prices (some of which result in capital gains taxes).

Graph #3

Graph #3

Federal Budget Surplus/Deficit % of GDP (Author)

Chart 3 shows the federal budget surplus or deficit as a percentage of nominal GDP, with dollar amounts shown for two time periods. The deficit has fallen significantly over the past year, but it is still at levels (relative to GDP) that in previous years would have been considered incredibly high.

Graph #4

Federal public finances % GDP

Federal public finances % GDP (Author)

Chart #4 shows spending and income as a percentage of GDP, plus the post-war average for each. Note that revenues are back to their post-war average, but expenses remain extraordinarily high.

Graph #5

Public spending vs unemployment

Public spending vs unemployment (Author)

Chart #5 compares the unemployment rate to federal spending as a percentage of GDP. It should be pretty clear that spending is largely determined by the unemployment rate, which is another way of saying Congress is trying to dull the pain of recessions by spending lavishly. In the case of our recent Covid-lockdown-related recession, Congress effectively went crazy and overspent ridiculously. Spending is still in la-la land, and of an order of magnitude that largely explains why we have so much inflation. Why? Because the spending surge has been largely funded by money printing, as I have repeatedly documented with my M2 growth charts.

The last thing this economy needs is more spending (affectionately referred to by politicians as “stimulus”). If there’s a silver lining to the Biden/Harris “cloud of incompetence,” it’s that Congress is unlikely to be able to muster the votes to authorize another round of “stimulus.”

Longtime readers and proponents of the offer know that government spending never stimulates. It’s just a headwind for the economy because the government is commandeering resources from the economy and effectively wasting them. Government will never be able to spend money as efficiently and effectively as the private sector can.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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