Good News About Federal Taxes

Gary North

May 22, 2012

There is a series of sites, run by one outfit, that provide charts on government spending and revenues.

Here is a chart from the revenue site. it shows the ratio between federal tax revenues and GDP. This ratio has not changed since 1945.

http://www.usgovernmentrevenue.com/revenue_chart_1910_2015USp_13s1li011mcn_F0f

This tells us that there is a barrier that the Congress has not dared to go beyond: 20% of GDP. Except for World War II, Congress has not exceeded this limit.

There are pessimists who say that the government has not yet begun to tax us. I think these pessimists are wrong. It would take something as cataclysmic as World War II to persuade American voters to accept anything above 20%.

The spending to GDP ratio shows an increase, but that is because of borrowing.

http://www.usgovernmentspending.com/us_20th_century_chart.html

This tells me that mass inflation is likely: in the low double digits. I do not think hyperinflation is likely. No large northern hemisphere nation has experienced hyperinflation since the end of World War I. No northern hemisphere nation that has not suffered a military defeat has suffered hyperinflation.

This points to a government default. The lenders will not continue to lend the U.S. government money at rates under 3% as the spending-to-GDP ratio keeps rising. Why not? Because the revenue-to-GDP ratio is not going to rise. The government must cut spending or else suffer very high interest rates. That will produce a recession. Then it will have to borrow from the Federal Reserve: mass inflation. If the FED stops to save the dollar, that will cause a depression and a default.

I think it will default. One way or another, it will default.

This will be bad news for Medicare recipients in poor health. It will be bad news for Social Security recipients. But the government will shrink in relation to GDP. That is very good news.

Some pessimists think the federal government can extend this for another 30 years. I don't think so. The spending is increasing too fast. The GDP isn't. The private GDP -- not counting government spending -- is probably contracting. In any case, it is not keeping pace with spending/borrowing.

The day of reckoning is not 30 years away. It's not 20 years away.