Greg Mankiw & J. T. Young: Everyone Cut a Tax Cut!

Greg Mankiw provides the graph, while J. T. Young provides the commentary:

Despite liberal condemnation of the Bush tax cuts, virtually no one embraces a complete return to their pre-cut level — including the Democratic majority in Congress and both pending presidential nominees. There is good reason. Implicit in this rejection is the admission that they were too high to return to. While the media won’t say it now, and certainly wouldn’t then, those supposedly halcyon days of fiscal policy rested on historically high tax levels … The Congressional Budget Office studied effective rates from 1979 to 2005. It showed the 1993-2000 average for all quintiles at 22.6% — higher than any other single year outside 1993-2000. The 2001 tax cut decreased these effective rates across the board, as the accompanying chart shows. A comparison of the distribution of the federal income tax burden is similarly illuminating. Using 2008 Internal Revenue Service statistics, the 2001 cuts shifted the income tax burden up the economic ladder. In addition to its impact on taxpayers, the 1993-2000 years also had a historically high federal tax burden on the economy. Over the last 60 years, the federal tax burden has averaged 17.9% of GDP; the 1993-2000 period averaged 19.2% … In contrast, the 2001-07 period averaged 17.9% of GDP — equaling the 60-year average despite the 2000 economic slowdown that tipped into a recession following 9/11.

We have called Greg Mankiw on reporting the tax to GDP ratio without mentioning the spending to GDP ratio before. No serious economist would deny that the long-run tax burden is driven by how much the government spends but we see not one mention of government spending or Federal deficits in Young’s commentary. We could look at the 60-year average for Federal spending relative to GDP, for example, which was 19.4%. I would argue that would be misleading as Federal spending for the first 20 years of this period averaged only 16.6%. Unless Young is advocating a return to periods where we had no Medicare and Medicaid and a much smaller Social Security commitment, looking at spending relative to GDP over the past 40 years is the most sensible comparison. This average is 20.8%.

So what is Young advocating here with this comparison – that we return to the deficit financing of the 1980’s and the past 7 years? Such fiscal irresponsibility is not sustainable. Maybe J. T. Young is not savvy enough to realize this but Greg Mankiw is. So why does Greg continue to tout Federal tax burden numbers that ignore the large deferred tax components known in some circles as the Bush deficits?