Declining Taxes, Tougher Choices

We've already posed the question of "Where does the money go?" but what does the federal government do when the money doesn't show up in the first place?

A new Associated Press analysis warns that tax revenues to the federal government are falling even faster than anticipated because of the recession. In fact, if trends continue, tax revenues could be off by 18 percent this year, the biggest single-year drop since the Great Depression.

This isn't exactly a surprise. Tax payments always drop off during an economic downturn, at the federal, state and local levels. Fewer people are working, so income taxes fall off. Corporate profits are down, so there's less revenue from business taxes. And people cut back on their spending and traveling, so sales and gasoline taxes bring in less, too.

This has been a major factor in the crisis that's been hitting state budgets (most notably California) and federal budget officials were expecting it, too. But the new analysis comes as the nation debates how to pay for health care reform, and as budget experts on both sides of the aisle warn that raising taxes on the wealthy by itself won't solve our budget problems.

There are a couple key points to keep in mind. One is something we just mentioned: it's normal for tax revenue to fall off during a recession, and to rebound when the economy picks up again. That's one reason why the government runs deficits during recessions – that, and because the government is trying to shorten the recession by pumping federal money into the economy.

The other is that, while deficits during emergencies are expected, the U.S. government runs deficits routinely, for 31 out of the last 38 years, in fact. Deficits are the default setting, in good times and bad. Since the government has to borrow money to keep going when it can't meet its bills, this is what drives up the $11 trillion national debt. And the problem will only get worse as the government's long-term fiscal problems mount.

The only way of solving this problem over the long term is by engaging the public in what they really want from the government, and what they're willing to pay to get it. The discussion guides in Public Agenda's Citizens Survival Kit and FacingUp.org will get you started.