Rising Health Costs

Budget analysts across the political spectrum say it is unrealistic to hold revenue to historic levels because rising health care costs will place extraordinary demands on Medicare.

"You don't create the future by looking at the past, OK?" said David Walker, the former U.S. comptroller general, who is founder and chief executive of the Comeback America Initiative, a nonprofit group that advocates deficit reduction. "You need to learn from history, but you also need to look at the trends and the forces that will drive the future."

Walker says tax increases should make up about one-quarter of a federal deficit-reduction effort that should focus more on debt-to-GDP ratios than on revenue or spending levels.

Sticking with historic averages of taxation at about 18% of GDP and spending at about 20% would require curbing future benefits and would avoid shrinking the private sector, said Keith Hennessey, director of the National Economic Council under President George W. Bush. As the economy grows, annual budget deficits averaging about 2% of GDP would cause the debt-to-GDP ratio to drop.

"If you don't mind having a much smaller private sector, then you can continue the programs the way they've been operating," he said. "But that is fundamentally different than, I think, most people's vision of America."

Federal Tax Revenue

Since the creation of Social Security and the military expansion that accompanied World War II and the Cold War, federal tax revenues have fluctuated around 18% of the economy, according to the Office of Management and Budget. The low point of 14.4% came in 1950, and the high of 20.6% occurred in 2000.

Economists generally agree that higher taxes restrain economic growth, though other factors make it hard to isolate that effect and determine how the economy would have fared under a different tax structure. For instance, the economy performed well during the 1990s after tax increases, and job growth was relatively slow during the 2000s after tax cuts.

Tax revenue plummeted in 2009 to 14.9%, again because of a recession and tax cuts. They remained at that level in 2010 and are projected to be about the same this year.