Despite effective marginal tax rates that are now at their highest level ever for many taxpayers, tax revenues relative to GDP are still relatively depressed. That’s mainly a reflection of the weakness of the current recovery, which has yet to create more jobs than existed at the end of 2008. There would have been upwards of 10 million more jobs today if this had been a typical recovery, and that would show up in the form of much stronger revenues, which would probably be well over their post-war average of 17.5% of GDP by now.
The reduction in spending relative to GDP, on the other hand, has been extraordinary—we haven’t seen anything like this since the unwinding of WW II spending. Federal spending topped out during WW II at over 40% of GDP in 1945, then promptly collapsed to 14.7% by the end of 1947. Then, as now, a huge decline in government spending failed—despite the warnings of Keynesian-trained economists—to generate a depression, and failed to send the unemployment rate skyrocketing. Supply-siders, in contrast, have an answer for what happened that makes sense: when the government controls fewer of the economy’s resources, the private sector has more room in which to practice that in which it uniquely excels: entrepreneurship, cost-cutting, risk-taking, and productivity gains.
One reason Obama is unlikely to link to this post: If we hadn’t had all that massive emergency and “stimulus” spending in the 2008-2012 period, the economy would be much stronger today. But now that the spending has been scaled back there is a decent chance that the private sector can give us some better growth numbers going forward. Those chances would rise appreciably if Washington could manage to reduce today’s unprecedented regulatory burdens (e.g., Obamacare, Dodd-Frank), reduce corporate tax rates from the highest level of any developed country, and simplify our mind-numbing and hugely burdensome tax code in exchange for a reduction in marginal income tax rates.
UPDATE: Charles Koch has written a brilliant and powerful essay in the WSJ on many of the problems that need to be fixed: “I’m Fighting to Restore a Free Society.”
If there’s any reason to be optimistic these days, it’s that there are so many problems out there that could be fixed in relatively easy fashion.