October 27, 2007
A BITTER FEUD AT THE MARGINS:
A Dearth of Taxes? (John Tamny, 10/26/07, Real Clear Politics)
In truth, tax collections in the U.S. tend to follow our nation's GDP pretty closely irrespective of the tax rate. As Discovery Institute senior fellow Bret Swanson recently wrote, there is a "remarkable tendency for Federal revenues to hover around 18% of GDP (and for personal income tax revenue to gather between 7.5 and 9% of GDP), no matter if tax rates are high or low."What this means is that if we grow the overall economic pie, we expand the taxable base. Sure enough, the reductions in top marginal rates that began in 1981 helped U.S. GDP to grow sixfold over the last twenty-five years and as a result, federal revenues have hit record levels nearly every year since.
Posted by Orrin Judd at October 27, 2007 7:57 AM
So despite the howls of his detractors (including Scientific American and Martin Gardner) in the 1980s, Ronald Reagan was right afterall. The Laffer Curve peaks around 18%. Tax more than that and govt revenue growth declines.
I suspect the real limit is the peak tax on the top earners. If you go over a 40% marginal tax rate the entepreneurs start working harder to hide income rather than to create more wealth.
Posted by: Gideon at October 27, 2007 10:25 AMAt first I thought we had a bit of a statistical problem comparing this article and the one posted yesterday from Investors Business Daily -- Bush the Big Spender? Check Again.
In the IBD piece, there is a table showing spending under GWB at 20.2% of GDP. Reagan was 22.3%. However, then I read the RCP article more closely and realized it is looking at tax collections and states that taxes are generally around 18% of GDP.
So, I added back the 40-year average deficit of 2.4% to the 18% (of GDP) collected in taxes and the spending seems to be about right at roughly 20% of GDP.