Taxes won’t help
A commenter to my previous post writes: “Tax increases on the wealthiest would keep rates below Reagan era rates, and add some revenue.”
No, they won’t. Not even close. Here’s why:
Now, this chart counts all tax revenues. Income taxes, corporate taxes, excises, tariffs, etc. All of them. It includes the low income taxes of the 1930s, the 90% top tax brackets of the 40s and 50s, the Kennedy and Reagan rate cuts of the 60s and 80s…it’s all there.
And what do we notice about this model? Well, a couple of things. First, the highest tax receipts as a percentage of GDP was 20.9%. That was in 1944. In 1945, the percentage was just north of 20%. I think I have a pretty solid–and obvious–explanation of why tax receipts jumped so high in those two years. Sadly, the Nazis are gone and the Japanese seem rather less interested in the Greater Southeast Asia Co-Prosperity Sphere project than they did back then, so a global conventional war seems out of the picture at the moment. Darn our luck!
But the other thing we notice when we look at this chart is that despite top marginal tax rates varying between 28% and 90% since 1945, tax revenues as a percentage of GDP seem to be locked in at about 18%. There is, in fact, only one explanation for the variations–minor as they are–in the revenue percentage since 1945, and that is economic expansion. Irrespective of the statutory tax rates, the single, overriding factor in increases or decreases in the revenue percentage has been economic growth. The percentage rises when the economy expands, and dips when it contracts.
As a practical matter, this chart shows us a very obvious, but little-understood phenomenon, namely, that 18% or thereabouts is the rate at which the electorate consents to be taxed. Think about that for a minute. Dwight D. Eisenhower presided over a system of steeply graduated tax rates with a top marginal tax rate of 90%. He got 18% of GDP in revenue. Ronald Reagan slashed tax rates, simplified the structure into three brackets, indexed for inflation, with a top marginal tax rate of 28%…and got 18% of GDP in revenue.
In the past couple of weeks, three different progrssive policy think tanks have released deficit reduction plans, all of which contained substantial tax increases, and which projected revenues as a percentage of GDP rising to over 23%.
Not. Gonna. Happen.
We know it won’t happen, because the American people have told us repeatedly, over the past 60 years, exactly how much revenue they’re willing to pay in taxes. You can jack around with tax rates all you want and you’ll get 18%. Unless you grow the economy. When the jobs are plentiful and the money is rolling in, the American people get a bit more generous. They’ll give you 19%. Maybe, if things are really going swell, 20%. But if the economy isn’t rolling hard, you’re gonna get your 18%–or less. Assuming you can lift 23% of GDP in tax revenues is just a fantasy.
Because here’s the thing: You can’t force people to make money. If they can make the same take-home pay working 35 hours per week under the new tax regime as they made in 40 hours per week under the old one, they’ll just work 35 hours per week. The more you penalize income, the less desirable additional income becomes. It’s almost as if people respond to incentives!
Bonus question 1: If the government collects about 18% in GDP irrespective of the statutory tax rates, what is the electorate telling you the desired statutory tax rate is?
Bonus question 2: If the main factor in increasing tax revenues is economic growth, would economic growth likely be greater or smaller under a regime of lower taxes?
Discuss among yourselves.