Wednesday, December 26, 2012

Taxes Through a GDP Lens: Revisited

I’m showing today an updated version of a graphic I showed on  December 21 of last year. Results for 2011 have been added to it, thus it is more up to date. Also shown on this graphic is the top marginal tax rate over the 1960-2011 period. A key point of the last posting (link) was that the tax rate appears to influence tax revenues and Social Security contributions not at all, but tax rates are certainly influenced by other events in the economy. I said:

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.

The interesting things to note here is the up-turn of tax revenues from 2010 to 2011, signaling recovery—if not massive growth—and the down-turn in contributions to social security in the last year. That dip was caused by a law passed in 2010 but effective in 2011—lowering payroll taxes.

What with top tax rates having no visible effects on taxes, the hullabaloo about rates today are entirely off the mark. They represent political realities, not economic. The notion that raising rates will cause the economy to dive are belied by this chart. Taxes rose sharply from the 1988 to 1992 level. So that happened? Tax revenues went for the sky—for an entirely unrelated reason.

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.

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