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Archive for July 27th, 2011

I testified earlier today before the Joint Economic Committee about budget process reform. As part of the Q&A session after the testimony, one of the Democratic members made a big deal about the fact that federal tax revenues today are “only” consuming about 15 percent of GDP. And since the long-run average is about 18 percent of GDP, we are all supposed to conclude that a substantial tax hike is needed as part of what President Obama calls a “balanced approach” to red ink.

But it’s not just statist politicians making this argument. After making fun of his assertion that Obama is a conservative, I was hoping to ignore Bruce Bartlett for a while, but I noticed that he has a piece on the New York Times website also implying that America’s fiscal problems are the result of federal tax revenues dropping far below the long-run average of 18 percent of GDP.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P. But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943. Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era.

To be fair, both the politician at the JEC hearing and Bruce are correct in claiming that tax revenues this year are considerably below the historical average.

But they are both being a bit deceptive, either deliberately or accidentally, in that they fail to show the CBO forecast for the rest of the decade. But I understand why they cherry-picked data. The chart below shows, rather remarkably, that tax revenues (the fuschia line) are expected to be back at the long-run average (the blue line) in just three years. And that’s even if the Bush tax cuts are made permanent and the alternative minimum tax is frozen.

It’s also worth noting the black line, which shows how the tax burden will climb if the Bush tax cuts expire (and also if millions of new taxpayers are swept into the AMT). In that “current law” scenario, the tax burden jumps considerably above the long-run average in just two years. Keep in mind, though, that government forecasters assume that higher tax rates have no adverse impact on economic performance, so it’s quite likely that neither tax revenues nor GDP would match the forecast.

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I think it may be time to update the dictionary definition of irony.

George Soros, the billionaire who finances statist organizations and causes in order to promote more government, has decided that he doesn’t want to deal with some of the new regulatory burdens resulting from the Dodd-Frank bailout legislation.

Consider this blurb from the Financial Times.

Quantum, which will continue to manage about $24.5bn of Soros family money, blamed the decision on new financial regulations requiring hedge funds to register with the Securities and Exchange Commission. “An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations”, Jonathan and Robert Soros, Mr Soros’ sons and Quantum’s co-deputy chairmen, wrote in a letter to investors on Tuesday. New regulations require hedge funds with more than $150m under management to report details about investments, employees and investors, and also makes them subject to possible inspections by the SEC. Mr Soros’ decision contrasts with his own reputation as an advocate for both government and corporate transparency.

The Wall Street Journal’s editorial page has some fun with this news.

Like many a rich political liberal, George Soros made his fortune in some of the least regulated corners of the capital markets. So it’s no great surprise that the left-wing financier announced yesterday that his hedge fund will cease investing on behalf of others in order to avoid Dodd-Frank’s new registration mandate. …This is one more example of Dodd-Frank’s 2,300-pages of unintended consequences. The 81-year-old Mr. Soros will no doubt still make a handsome living, but the trade-off is bad for the country. Better to have the billionaire preoccupied with decisions about allocating capital to maximize profit than spending his time donating to groups and politicians who want government to allocate capital for political purposes.

Poking fun at Soros and exposing left-wing hypocrisy is a noble endeavor, to be sure, but there’s a very serious side to this issue. The growing regulatory burden and increased level of intervention is both discouraging investment in the American economy and undermining the efficient allocation of capital that does get invested. The Dodd-Frank bailout bill is an obvious example, as is the IRS’s horrible interest-reporting regulation.

This translates into less growth, less vitality, and lower living standards (compared to what they would be in the absence of bad policy). The chart in this blog post is a good example of the cost of bad policy and the benefits of good policy.

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