A few months back, President Obama proposed a three-year spending freeze on what amounts to one-sixth of the federal budget. Our biggest entitlement programs, Social Security and Medicare, would be excluded. These changes are an exercise in image rather than substance. Given the spending agenda that is already in place, we can expect to see large increases in the proportion of gross domestic product that is spent by our government for years to come.
From 2008 to 2009 we saw the greatest annual increase in federal spending in the past thirty years. In the name of stimulating job growth, the ratio of spending to GDP rose by about 14 percent. The share of federal spending is now 24 percent of the economy, up from 21 percent in the last year of the Bush administration.
My analysis of data from 1950 to the present shows that periods with high tax-to-GDP ratios exhibit much slower economic growth than those with lower tax ratios. The GDP growth in high-tax years (defined as years during which the ratio of tax to GDP was above 18 percent, the sixty-year average) was about 1.5 percentage points lower than the growth rate in low-tax years.
