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Does Government Have a Revenue or Spending Problem?

People say the government has a debt problem. But what causes federal government debt? Deficits cause debt. Every time government spending is greater than the amount government collects in tax revenue, the government runs a deficit, which increases the debt. In this video, economics professor Antony Davies traces the root cause of government debt to find out if the problem is too much spending or too little government tax revenue.

Davies examines the data to determine whether the government debt problem is really a revenue problem. It turns out that federal tax revenue today is significantly greater than it was in the 1950s. Even adjusted for inflation and population growth, the federal government collects three times more tax revenue per person than it did 50 years ago. So if revenue isn’t a problem, why are we still in debt?

Ultimately, the data suggest that the debt problem is really a spending problem: No matter how robustly our tax revenue grows, government finds a way to spend everything it collects and more. Professor Davies concludes that the root cause of the government debt is spending, not a lack of tax revenue.

Does Government Have a Revenue or Spending Problem?

People say that the government has a debt problem. But debt is an effect. The cause is deficits. Every time the government runs a deficit, the debt increases. If the debt is like the outstanding balance on the government’s credit card, the deficit is the extra amount the government charges on its card each year. Debt is caused by deficits, but deficits are caused by the difference between tax revenue and spending. So perhaps the debt problem is really a revenue problem.

How much tax revenue has the government collected over time?

Federal tax revenue today is more than 20 times what it was in the 1950s. But that’s not a fair comparison. Prices are a lot higher than they were in the 1950s, so let’s adjust tax revenues to account for inflation. Adjusted for inflation, tax revenue is more than five times what it was in the 1950s. But that’s not a fair comparison either. There are a lot more people in the United States than there were in the 1950s, so let’s adjust tax revenues to account for population growth. Adjusted for inflation and population growth, tax revenue today is three times what it was in the 1950s.

This suggests that the government does not have a revenue problem. If the debt is caused by deficits and deficits are caused by revenue and spending, and if the government does not have a revenue problem, then that means that the debt problem is really a spending problem.

Since 1954, the average price level has risen 700 percent. How does that compare with government spending? Over the same period, the per-person cost of government has risen 3,000 percent. To put that in perspective, the government recently attempted to take over the health care industry in an attempt to rein in the rising cost of health care. But since 1954, the average cost of health care has risen only 2,000 percent. This suggests that we would have been better off to ask physicians to reform government than to ask politicians to reform health care.

The lesson here is that we don’t have a government debt problem or even a budget deficit problem. We have a spending problem. This means more tax revenue won’t solve it. In fact, it will make it worse, because no matter how robustly our tax revenues grow, government always finds a way to spend everything it collects plus more.

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