From the course: Finance Foundations: Income Taxes

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The relationship between tax revenues and spending

The relationship between tax revenues and spending

From the course: Finance Foundations: Income Taxes

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The relationship between tax revenues and spending

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- [Instructor] Now, let's look at a picture, that summarizes a lot of information about U.S. governmental tax policy for the past 50 years. This is U.S. government spending and tax collections, as a percentage of gross domestic product each year, for the past 50 years. The higher line is U.S. federal government spending. Roughly speaking, U.S. federal government spending is between 20 and 24% of GDP each year. The lower line is U.S. federal tax collections, which are between 16% and 20% of GDP each year. Now, what does it mean when spending is more than tax collections? This means that the government is operating in deficit. You can see a lot of deficits in this graph. We can learn a lot about recent U.S. history, just by looking at this one picture. For example, we see that spending, as a percentage of gross domestic product, was highest during the President Regan Defense Build-Up of the mid-1980s. We also see that spending as a percentage of total GDP, was the lowest in the mid to…

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