A Few More Musings on Taxes and an Economy

James Pethokoukis, writing for AEIdeas, has a thought.

First, some rough background:

From 2009-2012, revenue as a share of GDP has averaged 15.4% of GDP vs. 13.9% from 1948-1951 and 18.1% overall in the postwar era.


Imagine if we a) kept all the expiring 2001 and 2003 tax cuts, b) started indexing the Alternative Minimum Tax for inflation so it wouldn’t hit more and more taxpayers.

How would that affect tax revenue? The Congressional Budget Office tells us:

Under that scenario, revenues from 2013 to 2022 would average about 18 percent of GDP, which is equal to their 40-year average.

Indeed, we would be back to the postwar average of 18.1% by 2016.

I would argue that the AMT, which began life as a special assessment against all of 155 particularly hated-by-Progressives successful Americans, should be abolished altogether, but that’s a topic for another post.

Here are a couple of other numbers.  US GDP was $15.1 trillion in 2011, while Federal income tax collections ran to $1.273 trillion, or 8.5% of GDP (my number differs from Pethokoukis’ because I’m only considering individual and business income taxes and leaving out Social Insurance, ad valorem, and other taxes).  In 2007, US GDP was $13.3 trillion, while Federal income tax collections ran to $1.534 trillion, or 11.5% of GDP (yes, that’s a 17% drop in Federal income tax collections in the third year of the failed recovery).

Plainly, if the Feds just got out of the way of our economy, stopped demanding ever more taxes, stopped spending our money on failed “investments,” stopped paying essentially well-meaning individuals for not working, our economic recovery would push income tax revenues up those missing three per centage points—and having returned to 11.5% of GDP, Federal income tax revenues would approximate $1.7 trillion—a rise of nearly $500 billion in the first year.  And that’s just a static analysis.  At that rate of increase every year, the Feds would be getting a whole lot more in income tax revenue by 2016—again a static analysis.  Imagine the increase from a dynamic analysis, which would include all the feedback loops from economic growth—like individual spending, business growth, jobs increases for those currently on the Feds’ dole, etc.

Another thought: from the Tax Foundation, via the TaxProf, comes this:

[W]hat does the academic literature say about the empirical relationship between taxes and economic growth?  …the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.  In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.  Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.  …

[T]he lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy.  Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help.  Nor does the prospect of higher taxes on shareholders and workers.  If we intend to spur investment, we should lower taxes on the earnings of capital.  If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.

Why, with all that revenue enriching the Feds coffers, we could look forward to actually paying down/off our national debt, and then across the board reductions in income tax rates.

Except that tax revenues (partly) fund incumbents’ vote pandering “welfare” programs.

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