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We have an ‘outflow’ exceeds ‘inflow’ problem

Jim HamillALBUQUERQUE, N.M. — Wesley Bolin, former governor of Arizona, once said, “We’d like to avoid problems, because when we have problems, we can have troubles.”

We have a problem — a massive budget deficit in what economists of all political stripes seem to agree are good economic times.

This problem troubles some of us. But not all of us. Some deal with Gov. Bolin’s warnings by sticking their heads in the sand.

I am an accountant, so let me explain to you how it is that we have a budget deficit. Our outflows exceed our inflows. The “our” here is derived from the preamble to the Constitution, that is, it is we the people.

We the people spend money. Why? We hope that by doing so we can establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.

Well, it appears that those things do not come cheaply. Since 2008, our collective outflows have exceeded 20% of gross domestic product in every year. Unfortunately, our collective inflows have hit 20% of GDP only once since World War II, and that was in 2000.

In fiscal 2018, which ended on Sept. 30, the inflows were 16.5% of GDP. The budget deficit was $779 billion, up from $438 billion three years earlier. The projected deficit for the year ending this September is over a trillion dollars.

We had a trillion-dollar deficit in 2012, when we also had a fiscal meltdown. Current deficits are scary because they exist during “good” times.

In the period 2025-2029, when many of the 2017 tax cuts will expire, revenues are expected to grow to an average of 18% of GDP. But spending is expected to grow to 22.5% of GDP. By 2045-2049 the inflows are 19.3% of GDP and the outflows 27.5% of GDP.

I am an accountant, so let me explain to you how to solve this problem. We need more inflows and less outflows. When the two are the same, problem solved!

This problem cannot be solved solely by raising revenues or solely by lowering spending. Neither is politically feasible. Our troubles come from an apparent unwillingness to either raise revenue or lower spending.

Arthur Laffer made quite a name for himself with something called the “Laffer Curve.” This curve suggested that no revenue would be collected at a zero tax rate or a 100% tax rate. Somewhere between the two was an optimal rate that would collect the highest revenue.

Politicians have said this curve means if you lower tax rates you will collect more revenue. The curve, even if true, does not say this. It says there is some optimal rate for collecting the most revenue. If we are currently below that optimal rate, more revenue could be collected by raising the rate.

The simplicity of the curve appeals to the politician. But the U.S. tax system has no single rate so the curve cannot exist as drawn. Also, empirical tests of the curve suggest that labor supply is largely independent of tax rates.

Empirical tests do suggest that reported taxable income can very much depend on tax rates. In high-rate regimes the wealthy can successfully lower their reported incomes, and will have incentives to do so.

The 2017 tax changes significantly lowered corporate tax rates. Corporate tax revenues dropped from $297 Billion in fiscal 2017 to $205 Billion in fiscal 2018. Multinational corporations were also hit with anti-abuse tax changes called “BEAT” and “GILTI.”

These multinationals do not like to be beaten or to be declared guilty, so they are spending considerable resources to avoid these two taxes. Tax changes do change behaviors.

We have a revenue problem and a spending problem. And we do have troubles, because there is not an easy solution to either of these problems. Our elected representatives have been charged with finding a solution.

In 1941, the U.S. isolationist policies made us unprepared for entry into World War II. Just over 41 months after our entry into the war, victory in Europe was secured, and less than four months after that, victory in the Pacific.

In September 1962, President Kennedy launched our manned space mission by saying, “We choose … to do [these] things not because they are easy but because they are hard.” Less than 7 years later, we landed a man on the moon.

Now we can’t pass a highway bill. Fixing our inflows and outflows is not for an accountant — we all understand the math. But if we can’t renew the spirit of 1941 and 1962, we will have troubles.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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