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
  • Revenue isn’t increasing fast enough

Thanks for playing!



  1. Brick By Brick Investing says

    How about this… spending needs to be cut and taxes need to be cut in order to encourage GROWTH! Just like with our personal finances it is much easier to cut back spending than it is to increase revenue.

    • says

      There is nothing harder to cut than government spending, I must say. It’s like that quote: “Victory has a thousand fathers but defeat is an orphan”. No one wants to put their name on a spending reduction bill where they can be targeted.

      • Brick By Brick Investing says

        In my opinion that is the problem nobody wants to be the person to “cut spending” but even if we increased taxes considerably it still would not be enough to cover spending. Additionally by increasing taxes to cover spending we will be detering investment in our country AND successful entrepreneurs to conduct business here.

        • says

          You mean, not enough to cover ‘planned future spending’? I’ll elaborate on that in a future post, but if we drove over the cliff *and* held spending absolutely constant we’d close the annual deficit sometime over the next decade (population growth + inflation make up the gap even with the inevitable recession)

          • Brick By Brick Investing says

            Sometime over the next decade is way too far down the road. We may close in on our annual deficit by then but our debt will be enormous!

      • says

        That’s the problem right there – being a politician has become a job. No one wants to upset their constituents because they will be out of a job in a few years. When Congress was first created, everyone had jobs on top of being in office. Everyone only looks out for themselves.

        • says

          How would you fix it? Amendments saying 18% of GDP in maximum? Part time Congress? Pay-go? Super-majority for taxing or spending?

          Personally I’d lean towards some sort of amendment. Between Hauser’s law (plus inflation) and the long run Government spending rate of around 20% we could work something out.

          • says

            Part time Congress would only mean everyone will do whatever they can to make the most buck in the shortest amount of time then ditch the crapshoot for someone else to worry about. The only way we’ll fix any political mess is by getting money out of politics. Period.

  2. freeby50 says

    The fiscal cliff refers to increased taxes and spending cuts. So to avoid the fiscal cliff we’d have to both cut taxes and increase spending. Balancing the budget is an altogether different matter.

    • says

      Yea, I agree. I’m just an eternal optimist and hope that a Grand Bargain comes out of this.

      I won’t hold my breath; I promise.

  3. says

    The problem is that everyone is playing the game and no one is willing to do the dirty work. Let’s say you get someone really ambitious and forward thinking in the gov’t (hehe) and he pushes a totally independent consultant to come in and analyze what can be cut with the most immediate results. First they spent like $100K just getting the RFP out and then selecting a winner. Then there was a protest from the 2nd choice which delayed the project another 6 weeks. By that time, the 1st pick “really effective” consultant has become cozy with the agency cutting the checks and they give some watered down presentation about what can be cut and then they go to the board (of directors, trustees, commissioners, etc) who say that X actually can’t be cut because it’s in Supervisor Molina’s district. Oops! I was talking about LA. :) What you really need is someone who doesn’t give a f*** to go in and raise hell. Like a Joe Rogan or Stephen Colbert. Someone interesting, someone a little bit ruthless and crazy but who in the end still has heart. The end.

    • JT says

      Joe Rogan – I thought that guy was a joke until I heard him speak in a forum that wasn’t comedy. I have 10x more respect for him; he’s way smarter than one might initially be led to believe, and a real ass kicker. I’d vote for him.

      Hate to say it, but I think we need a minimum tax on capital gains that exceed some sum like… $1 million a year.

      • says

        Colbert is also a genius. I think a large number of comedians punch below their weight, but are actually pretty smart dudes.

        How did you miss the boat on Rogan though? He’s not afraid to shake things up (lots of swearing).

        Also – what about a flat (ahem, triangle) tax?

    • says

      Haha, I like that you laughed during “ambitious and forward thinking”. Do you buy the Ron Paul argument? You may as well vote for the earmark since it takes the money out of the hands of the executive branch and at least lets it be spent in Congress?

      I don’t know about people who don’t care – that was supposed to be a guy like Arnold Schwarzenegger, and look where that got him – one funny letter aside. But yes – I agree, it would have to be someone arrogant who really didn’t care too much who they offended, since they’d have to slaughter sacred cows on both sides of the aisle. But whom?