My letter to the FT and Martin Wolf's reply

Sir,

In discussing the United States’ long-term budget outlook ('The reality of America’s fiscal future', October 22), Martin Wolf notes that, according to the CBO, “a rise in federal revenue to 22 percent of GDP may be needed.” He describes this target as “surely achievable”.

A glance over the historical data suggests otherwise. The accompanying chart plots federal tax receipts as a percentage of GDP between 1930 and 2010. (Data are from the White House Office of Budget and Management, Historical Tables, Table 1.2.) Since the Second World War, revenues have remained relatively stable at around 18% of GDP. They have never amounted to more than 20.9% of GDP. This stability is all the more remarkable given substantial variation in tax rates over the 20th century. During the 1950s, for example, the top marginal tax rate on income was over 90%.

In 2012, tax revenues amounted to only 15.8% of GDP, which suggests that, as the recovery continues, there is some scope for reducing the deficit through increases in revenue. However, a jump to 22% of GDP would be without historical precedent.

Noah Carl,

Nuffield College, Oxford

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Thank you for your letter. 

I am aware of this fact. But the simple truth is that this stability is not compatible with the survival of the programmes the US has legislated, in an ageing society. So Americans have to choose. Raising the revenue ratio to 22 per cent or so seems to be the most effective way to meet its commitments. The alternative is to push granny under a bus. That is not going to happen. Letting the rest of government disappear is fairly crazy. So one is left with higher taxation.

Martin