The Remarkably Stable Amount of Federal Revenue as a Percentage of GDP


TaxProf Blog points to a Wall Street Journal piece by W. Kurt Hauser showing a hard fact that has yet to sink in on most budget-balancers: Since World War II, federal revenue as a percentage of GDP hasn't budged much from a bit shy of 19 percent. Regardless of tax rates and what have you, that's the amount the feds have been able to collect. Writes Hauser (of Stanford and The Hoover Institution):

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.

Why? Higher taxes discourage the "animal spirits" of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income. 

Whole WSJ piece here.

The folks at American Thinker have made a picture of the top marginal rate vs. total revenue. Here's what it looks like:

This has real and obvious implications for all plans to balance the federal budget and reduce debt load, including the co-chairs' draft proposal from President Obama's National Commission on Fiscal Responsibility and Reform (which brags about getting spending down "eventually to 21%" of GDP, thus locking in deficit spending).

Any budget plan based on revenue being better than 19 percent of GDP is just blowing smoke.

Hat tip: Reason columnist and Mercatus Center economist Veronique de Rugy.