Gang of Six Debt Plan (revenue analysis)

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by Daryl Acumen

I’ve spent the last day or so doing an independent analysis of the Gang of Six debt plan and I wanted to share a few preliminary observations.  The plan is pretty vague so I won’t spend a lot of time going over every detail of it, but I wanted to bring your attention to the revenue problems I see in the plan.

…this will start off a little technical, so bare with me!

First I did a statistical analysis of federal revenue figures since World War II.  I looked at data provided by the White House in conjunction with Obama’s last budget so that I wouldn’t be accused of using a biased sourced.  According to my analysis of the White House data, on average since 1947 the federal government has collected 17.8% of GDP in revenue.  The standard deviation of this was 1.2%.

A quick note about the standard deviation: 1.645 standard deviations from the mean in a normal distribution equates to a confidence interval of .05, meaning the odds of a number reaching that extreme are about 1 in 40 at either end of the spectrum (.05 = 5% / 2 = 2.5% = 1/40th).  1.645 standard deviations from 17.8% of GDP on the high end is 19.8%.  In other words, the odds of federal revenue exceeding 19.8% of GDP in any given year are about 1 in 40.  Put another way, we can expect revenue to exceed 19.8% of GDP two or three times every century at most.  Usually it will hove around he 17.8% average.

Page six of the Gang’s proposal contains a chart that clearly shows the relationship between spending and revenues since 1950.  You can plainly see on that chart that revenues hover around 18% of GDP.  They’ve broken 19% a few times over the years and only exceeded 19.8% once during the height of the Dot-Com bubble (a time in which employers were handing out BMWs as signing bonuses and the likes of which we will never see again in our lifetimes).

Unfortunately the Gang’s presentation does not forecast revenue or spending as a percentage of GDP after the current fiscal year.  We are forced to ‘deduce’ those percentages from he numbers given.  The presentation does however give us a clue on page nine.  There it compares it’s deficit reduction estimates with those estimated by the CBO analysis of the Fiscal Commission’s deficit reduction plan.  The deficit reduction estimates of the Gang’s plan mirror so closely those of the Fiscal Commission that we can assume that the Gang used basically the same economic assumptions.  Page six goes so far as to explicitly reference the Fiscal Commission’s and the CBO’s “plausible Baselines,” so it makes sense to assume that the plausible baseline numbers used by the CBO and Fiscal Commission’s “plausible baselines” were used as models for the Gang’s plan.

…still with me?

I happen to have a coy of the “The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform” (the Fiscal Commission plan) handy and in the appendix on pages 63 and 64, they provide the details of their plans assumptions and the assumptions provided by the CBO (the “plausible baselines”).  Starting with the CBO’s numbers you’ll notice something startling; The CBO’s “plausible” revenue percentages rise from 14.6% of GDP in 2010 to 19.5% in 2020.  As I’ve already explained in the previous paragraph, the odds of revenues reaching this level are remote, and the odds of revenues remaining at this level for any extended period of time are…well, very, very remote!  That said, it gets worse…

Being politicians, the Fiscal commission decided to set the bar even higher than the CBO’s “plausible” baseline just to give Congress something to shoot for!  Their revenue percentages gradually INCREASE the CBO’s assumptions starting with an additional .1% in 2012 and ending up a full percentage point higher at 20.6% in 2020!  It is important to note that federal tax revenues have NEVER reached 20.6% of GDP in history, and the odds of them every reaching that level are (without bothering to open my statistics book yet again tonight) very, very low!

Put another way, the CBO’s “plausible baseline” assumes that we sustainably approach my ‘every forty years’ level of revenue by 2020.  The Fiscal Commission predicts that we will reach this unsustainable revenue percentage four years earlier in 2016.

Since he Gang of Six clearly call out both the CBO’s “plausible baseline” figures and the Fiscal Commissions ADJUSTED “plausible baseline” figures in their debt reduction slide on page nine of their presentation, we can only assume that the revenue figures used to calculate the numbers in the rest of the document use these bogus assumptions as well.  If that is the case, then the Gang of Six is both planning on increases in revenue that will never materialize and is reporting levels of debt reduction that is cannot deliver!

I am an analyst by trade, so I’m used to digging through misleading numbers to get at the truth.  I’m also accustomed to reading the fine print that goes along with any assumptions given to support a particular report or plan.  It’s not surprising that  legislators and the press didn’t bother to research the facts before praising the Gang of Six’s proposal as a serious step toward a debt reduction solution.  In my personal opinion, they’ve done this country a dis-service by not checking their facts and have cost us crucial days needed to arrive at a credible solution.