The government’s deficit/debt crisis has united a majority of Americans in demanding significant spending cuts. Those who have built their political careers, on continuously expanding tax supported government programs, grants, subsidies, and entitlements – we’ll call them “looters”- are naturally alarmed. As always they seek to deflect blame away from themselves to taxpayers, especially the richest taxpayers who pay most of the cost of government. Recently they’ve made the misleading assertion that:
Federal taxes are lower than ever!
Really? In 1990 the top income tax bracket rate was 28%. Today it’s 35% and legislation passed last December will raise it to 39.6% two months after the next election. The corporate tax rate has remained unchanged for decades. So how can they claim taxes are lower than ever?
It turns out that in 2009 and 2010 total tax revenue from all sources, expressed as a percentage of GDP, was 14.9%, which was indeed the lowest since 1950.
This, we are told, is proof that the income tax bracket rates, especially on “the rich” are too low. But as the chart shows, revenue was above average in 2006 and 2007 when the same tax rates were in effect.
Why did total tax revenue, as a percentage of GDP, decline so much in 2009 and 2010? Because due to the recession:
- millions of businesses that were paying individual and corporate income taxes have ceased to exist;
- millions more businesses have smaller taxable profits;
- millions of people who were employed and paying taxes are now unemployed;
- millions more who are still employed are earning less taxable income than they were before 2009.
As a result, individual income tax, corporate income tax and payroll taxes produced less revenue for the government, even though tax rates and rules did not change. This year the economy has improved just a bit, and already revenue is up 10%, even though there were no tax rate increases and Congress enacted a temporary, one year reduction in the payroll tax.
Now, let’s ask the question the media aren’t asking: What about spending as a percentage of GDP? It turns out, as the chart to the left shows, that spending as a percentage of GDP is higher than any time in American history except for World War II.
There is a more direct way to determine if income tax rates are too low and taxpayers are to blame for the extraordinarily high deficits of 2009, 2010 and 2011 that have brought us to this moment of crisis. Instead of expressing revenue as a percentage of GDP, let’s simply compare gross tax revenue from year to year.
One would never guess from the looters’ relentless attacks on the Bush tax cuts that the government collected more tax revenue in 2007, the fourth year of the current, Bush tax rates, than any previous year ever.
The headline, “taxes are lower than ever” is the latest tactic, contrived to support the false claim that taxpayers rather than Congress and the President are to blame for the government’s fiscal crisis. Tax revenue, as a percentage of GDP is low because the mortgage crisis, mostly caused by the government’s two, giant mortgage companies, Fannie Mae and Freddie Mac, led to the recession, which has depressed taxable incomes and profits.
When government backs down from it’s current hyper intervention campaign and allows the private sector to begin to function normally, tax revenue will increase without an increase in tax rates. Unfortunately, that’s not likely to happen until we elect a new President who is more committed to Liberty rather than to expanding government power. In the meantime, the economic damage done by tax rate increases would likely to result in less, rather than more revenue.