Written by G. Ross Stephens   

The history of federal finances and the economy is a superior indicator of reality than the edicts of our politicians in Washington and elsewhere. History since World War II belies the concept that tax cuts for business and the wealthy is the road to economic prosperity. It’s hogwash. Yet, a broad spectrum of politicians in the United States have bought into this fallacy.

So-called ‘supply-side economics’ is not economics at all. It’s an ideology promoted by those who benefit therefrom – with a myriad of multi-level con games by corporations, the very wealthy, and politicians at federal, state, and local levels of government -- receiving contributions for their election and re-election from these beneficiaries. [Legislators are often given lucrative positions after they retire (Payment for contacts and past votes?).]

Supply-side theory does not work in an economy where corporate behemoths are structurally integrated, multi-jurisdictional relative to government, and owe no allegiance to any government in a world of tax colonies where profits can be hidden and taxes avoided.

The important question is: Does the economy contribute more to government than government contributes to the economy?

Supply-siders and many politicians assume the economy contributes more to government.

For over three decades after World War II, before Reagan, the corporate income tax brought in upwards of one-third of all federal revenue; now it’s about one-ninth of that amount (factoring in huge deficits). On tens of billions in annual profits our largest (American?) corporations pay no federal corporate income taxes, even on their earnings within the United States – Apple, General Electric, the five largest oil companies, and at least thirty other mega- corporations. Yet many corporations profit from hundreds of thousands of defense, national security, and other government contracts, living on the public dole.

Research from the early 1980s indicated that tax revenue derived from business sources to be nearly three-times as important compared to personal income in delineating the differences among the fifty states in their ability to raise revenue. Between FY1982 and FY2007, the relationship (coefficient of determination, r sq.) between tax capacity and tax collection for the fifty states declined from 81 to 39 percent. Analysis of federal tax reductions for the 1980s through the early 2000s indicate the Feds have also ‘given away the store’ using tax cuts, tax expenditures, abatements, special exemptions, and other loopholes. As business has become multi-jurisdictional and multinational, our governments have given away at least half their ability to raise revenue.

The Quantum Entanglement:

The history of government finances in the United States suggests that the plus and minus carryover (net increase or decrease) from one fiscal year to the next of: 1) federal revenue, 2) federal expenditures, and 3) the economy (gross domestic product, GDP) are highly interrelated. The quantum entanglement of these characteristics can operate, influence, and affect the economy for a period of at least six years; maybe longer if large deficits persist.

For thirty-five years after World War II, despite deficits, when we still taxed business and the wealthy (1946 to FY1981), we were outgrowing our national debt. It dropped from 127.9 percent of GDP to 32.5 percent.

Then came Ronald Reagan, the push for the supply-side approach, and the mega-corporation. For this fiscal year, 2013, total public debt (federal + state-local) will reach an estimated 136 percent of GDP – the same as 1946, give or take one to three percent.

Using the positive and negative annual carryover ($ billions) for 1945-6 through FY2010-11 (N=66), federal revenue collection and expenditures explain more than two-thirds of the variation in GDP (R sq. 1.23 = .704). The partial relationships indicate federal revenue collection is 1.8 times more important to the economy than expenditure patterns [those between GDP and revenue collection holding expenditures constant (r sq. 12.3 = .694) and between GDP and expenditures holding revenue collection constant (r sq.13.2 = .382)].

Lengthening coverage of this equation by five years (to 1942-3 through FY2012-13, N= 71) reveals the importance of federal spending as it relates to the economy, though somewhat overstated as all five years added had extremely large deficits – from 35 to 70 percent of the total budget, averaging 52 percent. For these seven decades, federal revenue collection and expenditure patterns explain three-fourths of the variation in GDP (R sq. 1.23 = .760). With this increased coverage, partial correlations squared (r sq. ij.k ) suggest spending is 1.7 times more important than revenue collection. Federal finances are directly related to the up and down swings in the economy, though spending is skewed by adding deficit years.

Government and the Economy:

Using the current years equation (above, N=66, FY1945-46 through FY2010-11) and lagging GDP data for one through five years reveals the contribution of government to the economy; while using the current year’s data and lagging federal finances for five years indicates the contribution of the economy to government. Summation of these overlapping time-periods suggest that government contributes from 21 to 26 percent more to the economy than the economy contributes to government (∑ R sq.1.23 = 3.410/∑ R sq. 1.23 = 2.707, and vice-versa). The yearly carryover of federal finances significantly affects the economy.

Government finances since World War II, federal plus state-local, constitute three-tenths to one-third of the total economy; revenue a bit less, expenditures somewhat more. Additionally, government provides much of the infrastructure needed for both the public and private sectors of the economy. Important infrastructure needs have been ignored over the last three decades as national security expenditures escalated, higher education shifted from a public good to a consumer good, and deficits exploded.

Government is not only an important part of the economy, it is the most important sector of the economy, particularly when state and local governments are included.

While these levels of association do not prove fiscal policy is causal, relationships over seven decades indicate an quantum entanglement between fiscal policy and the economy that cannot be explained by ‘supply-sider’ ideology.

We have the best government money can buy.

It’s been bought.