Wednesday, December 21, 2011

Taxes: a GDP Perspective

Reader russel, commenting on the last post, inspired another look at taxes and social security contributions. russel pointed to a graphic (link) showing that income taxes paid are 8 percent of GDP and essentially flat. What follows is a slightly different take on this same subject sticking to the 1960-2010 time frame. My data show all taxes paid (somewhat higher than federal income taxes alone) and also charts contributions made to “government social insurance,” to use the Bureau of Economic Analysis’ phrasing. I presume that it includes both Social Security and Medicare Contributions. Here is the graphic:

The total personal taxes paid averages, in this 51 year period, 11.9 percent of GDP. The trend line of the data is ever-so-slight up. The trend of social insurance contributions, which averaged 7.2 percent for the period, is strongly ascendant, but that may be due to the fact that the Medicare program passed in 1965.

I am again showing the top marginal tax rate for the period. It appears to have no influence on the trend of total personal taxes paid.  Recessions, booms, and busts, however, do show an influence. Booms and busts? Well, the biggest rise in tax collections as percent of GDP came during the dot-com boom, the biggest drop in the dot-com bust. And the next up-then-down is the housing bubble.

My conclusion is that tax rate shifts reflect the relative power of the various classes in the United States and act to distribute the wealth now in one direction, sometimes in another. When we do not feel a genuine threat—I’m thinking of communism now—the distribution is from bottom to the top. Oh, Stalin! Where are you when we really need you!
The data I am using comes from the BEA using the facility located here. Following links from there, I used Table 2.1 for Personal Income and Its Disposition and Table 1.1.5 for Gross Domestic Product.


  1. I don't think it is much of a surprise, especially if you talk to a very established tax attorney/accountant.

    In times of high rates income become hidden through various means to prevent collection of taxes. I believe people see such taxes as unfair or unjust and thus justify not paying Ceaser.

    Business certainly have the means and will to avoid taxes if it is "unjust".

    On the high end, I suppose that is tax shelters, offshore accounts and other quasi-legal methods.

    For the lower income brackets, that means under-the-table jobs, flea market for tax free purchases and relatively safe tax/fee avoidance like under-reporting the price of a private car transaction. (California's DMV charges sales tax and sets your annual renewal fee based on the sale value of the car. Pay in cash, and you can set it to whatever you want, saving yourself thousands over the life of the vehicle)

    So, it is quite possible that you can set the tax at 8 to 12% (Or, let's say.... 9%, to steal from a recent dropout) gather the same amount of taxes and have people likely thank the government for it. I dare say it will spark a tremendous growth cycle... thus collecting the nominal 8% of a larger pie.

    Or, you could continue to "raise taxes" and get little or nothing out of it as people will not pay taxes they resent, and you end up with 11% congressional approval.

    Well, I suppose it is more far, far more complex than that... there are significant social and psychological pressures at work here. But the discussion shows that the "obvious" and "logical" way to raise revenues does very little to the net numbers.

    Then again, I have yet to find my fellow humans anything but obvious or logical about taxes.

  2. To be sure, the tax code is more complex than the Gordian knot, hence it enables those who can afford the help to minimize their actual tax payments. To get rid of the code, however, and to replace it with something rational, will take someone of Alexander's or Napoleon's stature--and when such a figure appears, taxes will be the least of our problems...

  3. Oh, that is a wonderful graphic and an interesting series of posts. The last one was particularly good, rates versus job creation.

    An interesting thing I heard recently was (thought I can't provide a good source, sorry) that a recent study showed that expenditures on lobbying in DC for some group of large multinational companies exceeded for the first time the total that they paid in taxes. What an interesting tax code we do have...