Home > Facts and Figures, History Repeating Itself > More evidence that increased tax rates have little effect on revenue

More evidence that increased tax rates have little effect on revenue

Amid the brouhaha over whether to extend the Bush-era tax cuts, or “tax cuts for the rich” if you will, a simple fact is lost.  Tax rates have changed dramatically, yet tax receipts as a percentage of GDP more or less never have.  According to readily available data, tax revenue in the United States is remarkably stable, and it has been for decades.  Despite the top marginal tax rate topping out at 92%, often averaging somewhere in the neighborhood of 70%, and finally dipping as low as 28% of income for roughly the last hundred years (i.e., about as long as we’ve had income taxes), tax revenues as a share of GDP have averaged slightly less than 20% …pretty much the whole time.

From TaxProfBlog via the Wall Street Journal comes more evidence that tax receipts are remarkably stable, even if tax rates are not.  What is at the root of the issue here?

First, tax preferences.  Rates often go up, but with them come preferences for certain behavior (buying a house and having children are probably the two most well-known) that skew toward high-income taxpayers who itemize deductions.  Secondly, mobility.  Many high net worth individuals have chosen to leave rather than continue to pay taxes to their home country, leading to a veritable industry of journalists, real estate brokers, and immigration attorneys to help expats settle where Uncle Sam has a more difficult time reaching them.  Third, tax minimization.  Although cheating on your taxes is illegal, it is well-settled law that attempting to minimize one’s taxes is entirely acceptable.  Of course, the accountants and lawyers that it takes effectively minimize one’s taxes can only be paid for by the wealthy.

According to W. Kurt Hauser,

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

In response, Hauser suggests cutting rates and expanding the base.  In other words, target what is realistic and you’ll recoup the difference in tax rates through less avoidance.  Whether one should target a government confiscation rate as high as 19% is debatable, of course, but why be unrealistic with what we claim to take now?  Wouldn’t it be better if our tax code were simpler, more straightforward and more honest?  Perhaps Hauser is onto something.

Here are the data:

Of course, that’s all well and good, but the ultimate problem of year-to-year deficits and crushing total debt will never be solved until spending is cut to sustainable levels.  Contrary to popular opinion, tax receipts and deficits seem unrelated – debt goes down only when spending goes down.  Still, it is interesting to think about, isn’t it?

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