Should We Cut Spending or Raise Taxes To Avoid Driving Off The Fiscal Cliff?

Isn’t it funny how a wonky topic like the Fiscal Cliff can so grab the public’s collective consciousness, yet learning the relatively easy math skills to understand it doesn’t seem to be in vogue.

Well, America (/World, since this site does have a rather active international readership), it’s your lucky day!  I’ll make this simple and talk right down to earth in a language you can easily understand – visuals!

The Choice Between Taxes and Spending, In Two Graphs

All of this data comes from the Office of Management and Budget, in their Historical Data section.  First up, we have unadulterated outlays (spending) and receipts (revenue), and inflation, collated since 1871 by Robert Shiller.  Years after 2011 are, of course, estimates (assuming we are going ‘off the cliff’, so to speak).

Yes, I inserted inflation in there as an afterthought (mainly to be facetious – if I thought it would make a better example, I would be Rigorous and Fair™ and include population growth).  Caveats aside, if we had matched spending to inflation since 1900, Government spending would be around 15 1/2 Billion dollars a year.

Next up, let’s look at year over year spending since 1960.  Why 1960?  Well, to begin, so you can see individual years.  The beginning year doesn’t matter – but it’s instructive to see how spending and revenue have increased – annually – over the last 2 generations.

To summarize – Spending has increased every year except 1965 & 2009 (coming off a year where spending increased a whopping 17.94%), revenues have fallen year over year a total of 5 times.  Want a laugh?  If you invested $40,000 in an investment called ‘Government spending’ in 1961, you’d have $1,067,594.60 today – not a bad return!

The Requisite Skills…

Well, as you can see, it’s easy to predict the outcome of the fiscal cliff.  If the next years are anything like the last 112, spending will increase at a nice clip, as will the net revenues to the Treasury.  In 2012, receipts are estimated to come in around $2,468,599,000,000 (~ 2.5 Trillion), and spending is estimated at $3,795,547,000,000 (~$3.8 Trillion).  If nothing changes, those numbers will be $3,919,275,000,000 (~$3.9 Trillion) in revenue and $4,531,723,000,000 (~ $4.5 Trillion) in spending.

So, do you want me to answer my own question?  Nope.  I drew the graphs – now you can use the comments section to explain why either:

• Spending needs to continue to increase at the current pace
  (or)
• Revenue isn’t increasing fast enough

Thanks for playing!