December 5, 2012
As Michael Barone points out, historically, no matter the tax rate, tax receipts have almost never eclipsed 20% of GDP. The only time they did (20.5%) was in 2000 just before the dotcom bubble burst. Here's the chart:
Source: Economic Report of the President 2012, Appendix B, Table B-79, p. 412.
As Barone explains:
In the Obama years, federal receipts have hovered at 15 percent of GDP.Any serious economic plan has to reduce spending to below 20% of GDP because receipts just aren't going to get above 20% of GDP. But no one is interested in being serious.
That's just because tax rates are too low, Obama backers reply. Just raise the rates on high earners and the problem will be solved.
Actually, high earners don't make enough money to close the current budget deficit. You'd need to raise taxes on middle-income earners too.
But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates -- like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s -- have never produced federal receipts higher than 20 percent of GDP.
Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.
According to a Congressional Research Service study, the effective income tax rate on the top 0.01 percent of earners in the days of nominal 91 percent tax rates was only 45 percent. Others have pegged it at 31 percent.
In the 1970s, when the top rate on wage and salary income was 50 percent and 70 percent on investment income, high earners spent much of their time and energy seeking tax shelters. The animal spirits of capitalists, to use John Maynard Keynes' term, were directed less at productive investment and more at tax avoidance.
ADDENDUM: And, for the umpteenth time, any proposed spending "cuts" aren't cuts at all, just a reduction in the projected amount of increased spending.