Amazing Discovery: Revenue as Percent of GDP – Forty Year Average

Prepare Rev of Percent GDP

One of the most helpful lessons I learned in my research was understanding the historical relationship between GDP (Gross Domestic Product) and federal revenues as a percent-age of GDP. For example, in 2008, federal revenues were $2.5 trillion and GDP was $14.2 trillion; therefore, revenue was 17.61 percent of GDP ($2.5 trillion ÷ $14.2 trillion = 17.61 percent).

Over the past forty years, the amount of federal revenue as a percentage of GDP falls within a narrow band between 14.9 percent and 20.6 percent. The forty-year average is 17.79 percent.

Note the forty-year average of 17.79 percent is during years of high and low individual and corporate tax rates.

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Both Political Parties Are Responsible

Democrat or republican, opposite signs

Despite what you may have heard in the news, there is no political slant to the soaring federal debt:

Since the end of World War II, the budget shortfall has grown under six Republican and six Democratic presidents; it has grown when the Democrats have controlled Congress and when the Republicans have controlled Congress; and even the twelve years of budget surplus (1947–1949, 1951, 1956–1957, 1960, 1969, 1998–2001) are almost equally split between the parties’ control of the White House and Congress. (source) Bottom line, there’s no point in pointing fingers. We’re in this mess together and we need to work together to prepare the coming economic storm.

Our current economic problems are not the result of one piece of legislation, one president, or one session of Congress. Our current economic woes are the cumulative result of a long series of fiscal policy decisions over many, many years. Let’s take a brief survey of American history since the Franklin Roosevelt Administration as it relates to fiscal policy:

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Three Terms Everyone Must Understand

Dictionary and magnifying glass

As you look at economic data, there are three terms that everyone must understand: budget surplus, budget deficit, and national debt. Each fiscal year, when the accounting books are closed on September 30, the federal government ends the year with either a budget surplus or a budget deficit:

A budget surplus is when government revenues (that is, taxes paid by you and me) exceed expenses for the current year. (That’s good!)

A budget deficit is when government expenses (all the money the government spends) exceed revenues for the current year. (That’s not good!)

All during the year, whenever our nation’s expenses exceed income, the government pulls out the national credit card and says, “Charge it.” This means we finance our debt by selling government bonds (which are promises by the government to pay at some future time) to domestic and foreign investors (such as bond-market investors and other countries, such as China and Japan.) When we overspend (that is, have a budget deficit) we have to borrow money (by issuing more bonds) and the national debt increases.

The national debt is the total amount our nation owes its creditors (domestic, foreign, and intragovernmental lenders and investors). This figure includes all previous deficits (plus interest owed on all outstanding bonds) minus any payments the federal government has made to pay down the national debt.

YOUR PREP PLAN: Be able to explain these three important terms.

  • Budget Surplus (only 4 surplus in last 40 years)
  • Budget Deficit
  • National Debt
  • Keep up to date on the current amount of our national debt