3) How did the Fiscal Commission arrive at the 21 percent of GDP equilibrium for spending and revenues? Why did the Commission feel that revenues of 21 percent of GDP are a realistic target since revenues have historically averaged slightly more than 18 p
The Commission set out to close the unsustainable gap between spending and revenue, with the eventual goal of achieving balance. The Commission concluded that 21 percent of GDP was the highest revenue level consistent with robust long-term economic growth, and that 21 percent of GDP was the lowest level of spending that ambitious spending restraint could realistically expect to achieve in the next two decades. The revenue level is somewhat higher than historical averages, but the Commission concluded this was necessitated by changing demographic factors which will create greater pressures on spending programs in the future than has been the case in the past.
The main reason that revenues have never reached 21 percent of GDP is that when revenues get close to that level Congress has enacted tax cuts. The Commission report recognized that Congress may wish to enact additional rate reductions if revenues increase more rapidly than expected, but simply sets a higher bar for the revenue level at which tax cuts should be considered.
While it is true that there could be some negative feedback from increasing tax rates, the Commission does not attempt to raise revenue through higher rates. Rather, the commission plan raises new revenue by eliminating or scaling back most of the deductions, credits, and other so-called “tax expenditures” while actually lowering marginal tax rates. A tax reform proposal which broadens the base will lead to less tax avoidance and faster economic growth, and can reasonably be expected to eventually raise revenue up to 21 percent of GDP. Also note that the Commission plan would increase revenues as a percentage of GDP very gradually, reaching approximately 19.3 percent of GDP by 2016 and 20.6 percent of GDP by 2020, which are well within historical norms. Revenues would not reach 21 percent under the Commission plan until early in the next decade.