One of the big myths in the media is that the federal government must raise personal income taxes to pay for the deficit. Obama is portrayed in leftist blogs and the loser in the $2.4 trillion debt ceiling increase because he did not receive concrete tax increases in the legislation.
Can the government raise tax collections by raising personal tax rates?
Raising personal tax rates is good politics. Demonizing a small number of citizens, telling the gullible public that the rich have the money works. It is the path to power and privilege for thousands of years. Lenin, Hitler, Obama, Chavez, Castro, Hussein, Johnson, Carter, Pol Pot, Peron, Mao, have used the tactics of demonizing and vilifying the rich to gain access to a privileged lifestyle that would otherwise have been unimaginable for these former peasants and social misfits.
The historical White House records available to the public are the most damning evidence against politicians claims that taxes must be increased to "balance the budget."
Let us put the proposition to the test. As a professor I can do just that. In the class assignment below students are asked to use old tax rates from the Tax Policy Center and White House historical records. Both sources reliable and accessible on the Internet.
Enjoy!
With the historical tables calculate the following:
1. Use the tax table handout.
Example: 84+91+92+92+91+91+91+91+91+91 = 905/10 = 90.5% or the average top rate for the50s=90.5.
1. From 1950 to 1959 what was the average top tax rate?
Answer: 90.5%
2. Use the “Dan Mitchell” GDP consumption numbers.
Example 15.6+14.2+19.4+20.4+18.8+17.3+16.5+17.0+17.9+18.8 = 175.9/10 = 17.59 or about 17.6%
2. From 1950 to 1959 what was the federal consumption of GDP?
Answer: 17.6%
Economist Arthur Laffer became famous for his Laffer Curve. The Laffer Curve proved that there are negative consequences to the economy if the personal tax rate is increased over 25%
3. Use the White House numbers.
Example: 14.4+16.1+19.0+18.7+18.5+16.5+17.5+17.7+17.3+16.2 = 171.9/10 = 17.19 or about 17.2%
3. What was the percent of GDP in taxes collected from 1950 to 1959?
Answer: 17.2%
4. Average top tax rate 1960-1969?
Answer: 80.3%
5. Federal consumption of GDP 1960-1969?
Answer: 18.6%
6. Percentage of taxes collected from 1960-1969?
Answer: 17.9%
7. Average top tax rate 1970-1979?
Answer: 70.2%
8. Federal consumption of GDP 1970-1979?
Answer: 20.1%
CATO Scholar Dan Mitchell has made a series of videos explaining the Laffer Curve to students
9. Percentage of taxes collected from 1970-1979?
Answer: 17.9%
10. Average top tax rate 1980-1989?
Answer: 48.4%
11. Federal consumption of GDP 1980-1989?
Answer: 22.2%
12. Percentage of taxes collected from 1980-1989?
Answer: 18.3%
13. Average top tax rate 1990-1999?
Answer: 36.7%
14. Federal consumption of GDP 1990-1999?
Answer: 20.7%
15. Percentage of taxes collected from 1990-1999?
Answer: 18.5%
16. Average top tax rate 2000-2007?
Answer: 36.5%
17. Federal consumption of GDP 2000-2007?
President Reagan hired Arthur Laffer as his economic adviser. Personal taxes under Reagan were lowered to 28%
Answer: 19.3%
18. Percentage of taxes collected from 2000-2007?
Answer: 18.0%
19. Average top tax rate 2008-2011?
Answer: 35%
20. Federal consumption of GDP 2008-2011?
Answer: 23.6%
21. Percentage of taxes collected from 2008-2011?
Answer: 15.4%
22. What happened to tax receipts as a percent of GDP from 2003 to 2007 when Bush cut the top rate from 39.6% to 35%?
Answer: Tax receipts increased by 2.3% of the GDP or 40.1% in nominal dollars.
Note: The tax reduction may have been partially responsible for the spectacular growth in federal revenues but a more reasonable explanation would be the housing bubble. Still this is a good example to show students that cutting taxes does not lead to deficits. Revenues increased 40.1%. The problem was spending, not revenues. If Bush had shown the slightest bit of fiscal restrain he would have balanced the budget.
23. What happened to tax receipts as a percent of GDP from 1993 to 2001 when Clinton reduced the size of the federal government from 22.1% to 18.2%?
Answer: When Clinton reduced the federal government share of the GDP from 22.1% to 18.2% the taxes collected by the federal government increased from 17.5% to 20.6% in 2000 and 19.5% in 2001. It is no secret that cutting federal spending to 18% of the GDP will balance the budget. Ask Congressman Paul Ryan about it.
24. Does the government collect more taxes as a percent of the GDP when the top rate is raised?
Answer: Raising the tax rate above 28% is not productive. Less revenue will be collected, people will engage in tax avoidance behavior, and resources will be misallocated into less productive activities for the sole propose of avoiding the tax man.
25. If raising taxes does not collect more taxes why do politicians insist that taxes need to be increased?
Answer: Power and corruption. Congresspersons, Senators, and the President use the tax code to solicit donations and create special interest political constituencies. A simple flat or fair tax would take this power away from politicians.
26. From 2008 to 2011 what happened to federal consumption as a percent of GDP?
Answer: It increased from 20.7% of the GDP to 25.0% of the GDP.
27. Did increased federal spending result in increased tax collections as measured as a percent of the
GDP?
Answer: No, federal tax collections dropped dramatically from 17.5% of the GDP to 14.4% of the GDP.
28. Does there seem to be an inverse relationship between the size of the federal government and taxes collected?
Answer:
Year……………….Federal government expense, %GDP…………….Tax Receipts, %GDP
1950s……………………..17.6%…………………………………………………………17.2%
1960s……………………..18.6%…………………………………………………………17.9%
1970s……………………..20.1%…………………………………………………………17.9%
1980s……………………..22.2%…………………………………………………………18.3%
1990s……………………..20.7%………………………………………………………..18.5%
2000-07………………….19.3%………………………………………………………..18.0%
2008-11………………….23.6%………………………………………………………..15.4%
What is the most striking observation is that from 1950 to today we have had many changes in the tax code but tax collections have been remarkably stable between 17.2% to 18.5% for the various decades with the sole exception of 2008 to 2011. This drop in revenue collection has nothing to do with the tax code. It has everything to do with poor economic policies from both Bush and Obama. Spending our way out of the recession has been a colossal failure and adding another $2.4 trillion to the deficit will retard economic growth further.
This also emphasizes why politicians on the left are so adamant about other tax sources like the value-added tax (VAT). The smart ones know raising personal income taxes will not generate more revenue. More regressive taxes are needed to capture additional wealth from the middle and lower income earners. The VAT is the perfect tax because it is hidden in the price of goods and services making it almost impossible for the average person to tell what percentage of the price of a product is tax.
It is also interesting to note that during the Great Depression tax collections were in the single digits . A scary thought considering the 2011 tax collection rate was 14.4%, the lowest since 1943.
Economic lessons like this one should be in every economic textbook in America.
Why are these missing?
Most universities, colleges, high schools, are funded by government to some extent. The few private institution that exist cater to government elites. Harvard, Yale, Columbia will give students the same inferior economic education that the government colleges and universities provide. President Obama and Bush are examples of inferior education received at these institutions. It is increasingly up to individual economics professors and teachers to search out and provide their students with useful lessons that will have an impact on the students long after his or her college days are over.
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