Free Markets, Free People

Daily Archives: July 16, 2011

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:

Tax Revenues as a Percentage of GDP by Year, 1933-2010

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.


Dale Franks
Twitter: @DaleFranks

Fantasy and reality: Obama says “80% of Americans ‘sold’ on tax increase”

That’s the “out of thin air” statistic President Obama tossed out at a presser yesterday.

President Obama on Friday kept up the pressure on Republicans to agree to revenue increases in a deal to raise the debt ceiling, claiming 80 percent of the public supports Democrats’ demand for tax increases.

"The American people are sold," Obama said. "The problem is members of Congress are dug in ideologically."

Throughout the press conference, Obama blasted Republicans for ignoring what he said is the will of the American people by rejecting tax increases that would balance out spending cuts in a debt package.

This is typical Obama – when he doesn’t get his way, he claims things which aren’t true and shoots at the other side with things like the Congress is “dug in ideologically”.   In fact the Republicans who won Congress are merely doing what they said they’d do.  But the point is that Obama uses his bully pulpit to, well, bully instead of talking like a statesman and and pushing for a compromise solution.  There is no one more “dug in” ideologically than the man accusing others of this supposed “sin”.

Oh, and as for the stat?  According to Gallup, Mr. Obama if fudging it:

Americans’ preferences for deficit reduction clearly favor spending cuts to tax increases, but most Americans favor a mix of the two approaches. Twenty percent favor an approach that relies only on spending cuts and 4% favor an approach that uses tax increases alone.

The mix?

  • Only/Mostly with spending cuts: 50%
  • Only/Mostly with tax increases: 11%

And, there’s more:

Two months ago, The Hill conducted its own poll that showed opposition to tax hikes  at 45%, with only 13% favoring an even split between tax hikes and spending cuts to solve the deficit problem, with another 11% supporting a 2/1 split for spending cuts to tax hikes, and 15% for a 3/1 split.  Even under the most liberal (pun intended) definition of “balanced,” only 39% in that poll opted for the idea.

So there certainly isn’t any 80% clamoring for tax increases.   In fact almost half want to see a huge reliance on spending cuts with few wanting it done with tax increases.    As we’ve noted here before, once the spending cuts are made – actually made, done and done – then it may be time to talk about tax increases.   Maybe.  But until the spending cuts have actually, positively been made, the “need” for increased taxes aren’t at all going to be something the American people are “sold” on.

Meanwhile in another sector of fantasyland, we have Representative Sheila Jackson Lee with a completely different take on the matter:

"I do not understand what I think is the maligning and maliciousness [toward] this president,” said Jackson Lee, a member of the Congressional Black Caucus. “Why is he different? And in my community, that is the question that we raise. In the minority community that is question that is being raised. Why is this president being treated so disrespectfully? Why has the debt limit been raised 60 times? Why did the leader of the Senate continually talk about his job is to bring the president down to make sure he is unelected?”

Obviously Ms. Jackson Lee was in hibernation during the 8 years of the Bush administration when the word “incompetent” was almost used routinely with his name.   Of course the point Jackson Lee is making and something we’ve seen used time and again by the left when they are out of credible ammo is the race card.

"I am particularly sensitive to the fact that only this president — only this one, only this one — has received the kind of attacks and disagreement and inability to work, only this one," said Jackson Lee from the House floor.

"Read between the lines," she continued. "What is different about this president that should put him in a position that he should not receive the same kind of respectful treatment of when it is necessary to raise the debt limit in order to pay our bills, something required by both statute and the 14th amendment?"

Reading between the lines I only see cluelessness and the usual leftist tactics.


Twitter: @McQandO