The Record Tax Receipts Conundrum

Recently, the IRS announced that it had received a record amount of tax revenue from U.S. citizens and corproations. While you can debate the causes of such record revenues (I come from the camp that if you cut taxes, you actually get more compliance with tax laws and thus more revenue), and such a debate will no doubt continue.

But at that same time we have record tax revenues, we have record budgets as well. The federal governement has spent more under a "conservative" than under any other President in terms of real dollars. Yet no one seems to question the wisdom of the spending done by Congress and the President. Sure, we question the propriety of earmarks and the sheer naked power politics that earmarks symbolize, but as a nation we have yet to seriously address a very real problem--what happens when, not if, but when the taxes flatten out or worse drop off for what ever reason. Of course, that doesn't even touch the explosion in entitlement spending that is coming.

Here the federal govenrment needs to take a cue from the states and take a long hard look at restraining spending now. For most of the 1990's and early 2000's, most states enjoyed a bouyant economy that boosted tax revenues. Instead of spending wisely and saving for a rainy day, the states spent like drunks in Las Vegas--libarally and without concern for future downturns. The problem is that down turns are here and the readjustments are not pretty.

During the boom years, governments can spend money to appease interest groups, groups that in lean times would have gone begging or ignored altogether. In lean times, government spend only what they must, focused on those functions it must perform. Yet, when boom times are upon us, instead of spending wisely, if a bit more liberally, governments begin to spend willy-nilly, not realizing that they are creating a society built solely upon the largess that will not last. Inevtiably, just as the states are starting to see now, tax revenues flatten or fall, but the boom time has created constituencies to cry out to be supported as they were in boom times. The cuts are both painful and not necessary.

Fiscal discipline on the governmental level is like fiscal discipline on the familial level. In lean times, only the necessities receive expenditures. In boom times, the smart family banks for the next lean time while still indulging in some ways.

Many states, like my own Maryland, failed to bank for the lean times and indulge less during the boom times. Now that the state faces a massive shortfall, the spending cuts are creating shrieks of pain across the state.

The federal government is now in a similar position. Its spending on interest group appeasement can be sustained in the boom times, but eventually the lean times will return and they are coming with a vengence. Better to create a few whimpers of pain now than the screaming that will come in future years.