Tuesday, December 18, 2012

Tax Rates and Tax Revenue As A Percent of GDP

The discussion about the Fiscal Cliff and taxes got me thinking today.  Does tax revenue TRULY increase when you reduce taxes?  Many Conservatives point to the Reagan tax slash and revenue increase that occurred in the 80's but Liberals will claim that it merely followed the rate of inflation.

So I went out to look at details, and found some surprising results.

First I wanted to see if you raise taxes, does the tax revenue REALLY change?  So I thought, "What is a good stable comparison to measure tax rates against?"  The comparison I came up with was Tax revenue as a percent of GDP, and this is what I found;

What I noticed was that as a percent of GDP, after 1950, regardless of the tax rate, the tax revenues as a percent of GDP was stable around 18%, even when Reagan slashed taxes.

I was just about to post that information when I thought of a rebuttal; "Well, that doesn't account for the growth in GDP created by lower taxes!"  So, I looked that up as well, and I found this;

Looking at the major changes, the Reagan cuts did boost the economy from in the red to 5% and about 7% growth, but quickly fell back to 5% the next year followed my modest 3% GDP growth years following that. The real confusing stats are looking at the cuts in 1968 and around 1988 when the rates were slashed, but GDP soon fell to 0% growth, and in the 90's when Clinton raised taxes and GDP grew at between 4% and 5%.

At best what I can conclude is this;
Cutting taxes may or may not raise both GDP and total tax revenue, but the growth is strictly short term, and regardless of what you put the income tax rate at, the government is only going to haul in about 18% of GDP.  From that, this whole bit about soaking the rich isn't going to make a difference.  The wealthy will simply find a way to prevent their money from going into the government coffers.

The real money maker?  Cutting spending.

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