Tuesday, January 17, 2012

Real (Revenue) Talk

There has been a lot of talk recently about government deficits over the past few months. The US and the Euro Area have been mired in political debate about how public expenditures can be cut in order to reduce deficits. Public expenditures include defense spending, pensions, health care, education, etc. However, what has been lost in this debate is the other side of the coin: revenue enhancement. I am not a believer in cutting important expenditures such as health care and pensions; it puts too much of the burden on the working class. Austerity measures are unpopular and, in large doses, simply seem to exacerbate downturns. This is why I wanted to approach the deficit issue from the revenue side: where can governments increase revenues to reduce their deficits? The chart below shows a breakdown of US federal government revenue from 1950 to 2008:


Corporate income taxes have clearly diminished as a proportion of total federal revenue. As a result, corporate profits have exploded:

It seems as though increasing the tax base is as easy as taxing corporations at a higher tax rate. There are other areas to target to raise federal revenues including the capital gains tax (realized capital gains make up around 5% of GDP) and higher income individuals. I will try and address these in future posts.

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