Unexpectedly Intriguing!
May 9, 2008

Andrew Biggs writes in the WSJ, (emphasis ours, HT: Greg Mankiw)

Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.

If the [Bush] tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.

Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average.

Tax collections from federal personal income taxes will not rise to 10.8% of the total economy on any sort of sustained basis. Regardless of the rates that have been levied against personal income since 1946, ranging from 1954's highly progressive tax rates with a top rate of 91% to today's still progressive, but much flatter tax rates with the maximum rate set at 35% (see our inflation-adjusted comparison between 1954 and today), the federal government's personal income tax collections typically range between 7.2 and 8.8% of GDP:

Personal Income Tax Percentage of GDP, 1946-2006

In fact, when the government's personal income tax collections has exceeded 8.8%, it has done so for very specific and not sustainable reasons.

So, why won't the government collect 10.8% of GDP through personal income taxes? Basically, two things will happen to dynamically shift the government's tax collections into the long-term historic range:

  1. With higher tax rates, the members of the U.S. Congress will institute a larger number of tax breaks that benefit their high-income earning political campaign donors, that will allow them to avoid paying significantly higher taxes.

  2. The underlying distribution of household income will shift so that total tax collections will drop back into the 7.2% to 8.8% range.

Where that second reason is concerned, there are a couple of mechanisms at play. First, since many high income earners have the ability to choose when and how they're paid, they will use this ability to avoid subjecting the money they're really making to the U.S.' personal income taxes. It might still be taxed by other means, but it will be at more favorable tax rates, which leads to the second mechanism.

With higher marginal personal income tax rates in the offing, large numbers of individuals who will be subject to these tax rates will alter their behavior - they will throttle back their efforts since they will no longer reap as great a reward for doing so.

That latter driver behind shifting the distribution of income will have real economic consequences, including a U.S. economy that grows at rates far less than its potential.

It's just not a good idea. Politicians looking to reap drastically more tax money to support their insatiable lust for power and ambitious spending programs through higher personal income taxes will be thwarted by millions of people seeking to simply keep what they believe is a fairer share of what they earn.

Labels:

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.