The Missing Link: Growth

June 2, 2011

As the budget fight unfolds, keep in mind this chart from Bret Swanson about the various levels of tax revenues from differing growth rates:

Bret writes:

The consensus long range projection is just 2.5%. Fine, what if we could bump growth to a measly 3%? We would still generate an additional $25 trillion in tax revenue over the 40-year period. Didn’t the Medicare actuary just tell us the program’s unfunded liability is $24.6 trillion? Boosting the share of the economy we collect in taxes doesn’t do any good if the economy lags. Collecting 20% or 25% of GDP in taxes, as some propose, doesn’t get us anywhere close to balance if we grow just 2% or 2.5%. On the other hand, 4% growth with the historical 18% tax-GDP ratio keeps up with even our current profligate spending path. The power of compound growth towers over every other consideration.

 

Bret prepared this data for a terrific National Chamber Foundation presentation he delivered earlier in the month. It is strange that the budget/entitlement conversation is framed today as mostly involving unpleasant options—cutting benefits that people like, kicking the can down the road, dramatically hiking taxes. Fostering conditions for economic growth is win-win, and it’s bizarre it’s not more central to the discussion.