Taxes, as a share
of gross domestic product (GDP -- the output of goods and services
produced by labor and property located in the United States), have
remained fairly constant over time, hovering around 18% to 21% of
Q: Why then
has Washington, D.C., gone from talk of surpluses to deficits, with
federal revenue charts looking like mountain ranges, with erratic
peaks and valleys?
the economy drives the budget, not the other way around.
Picture GDP as a
pie. Eighteen percent of a huge pie is considerably more than 18
percent of a small pie. Therefore a larger and more robust economy
will result in more federal revenue.
policies would create a more robust economy?
tax rates create better economic conditions. It's simple: lower tax
rates = more robust economy = more federal revenue.
Tax relief will
boost the economy's performance. To energize a soft economy,
lawmakers should seek far larger reductions in the tax penalties
that are imposed on productive behavior. The higher the rate, the
steeper the penalty.
higher tax rates raise more revenue?
Higher tax rates don't raise more revenue, as
this chart shows.
Federal Revenue and Spending Book of Charts, reveals the
Top Federal Individual Income Tax Rates, 1960-2002, shows that
the income tax rates have dropped during the last nine
administrations, with the greatest relief to taxpayers coming from
During that same
time, as chart
Total Federal Tax Revenue per Taxpayer, 1960-2002 shows,
revenue has continued to grow.
Long Term Tax Reform
simplifying the tax code is the long-term goal, and lowering taxes
will help control federal spending. Every dollar the government
spends is a dollar removed from the private sector.
Lower tax rates
and other long-overdue tax reforms will help to promote a vibrant
economy. This, in turn, will help to generate at least some
additional revenue and thereby create a virtuous cycle that will
allow for further tax reductions.
If Russia can have
a 13 percent flat tax, U.S. lawmakers should be able to reduce
America's tax rates.
Many states are
facing budget deficits, but as examined above, raising taxes will
not reverse their situations.
Many states have
encountered budgetary shortfalls because of excessive spending.
Indeed, 47 out of 50 states increased their spending by over 4
percent a year, as Heritage has reported in the WebMemo: How to
Cut Taxes and Balance State Budgets.
The goal of
tax policy is to maximize economic growth, not tax revenues.
budget deficits and surpluses have played a big role in the
political debate. As a result, some tax policy proposals, such as
reductions in the capital gains tax, are judged primarily by their
effect on tax collections.
Yet there is
no evidence that fiscal balance has any impact on the economy.
Putting revenue maximization ahead of sound tax policy is therefore
a misguided approach and should be discarded.
arguments, see Daniel Mitchell's Backgrounder, The
Correct Way to Measure the Revenue Impact of Changes in Tax
Rates, which shows how the rich paid more under the 1920s tax
cuts, the Kennedy tax cuts, and the Reagan tax cuts.
The Joint Economic
Committee of Congress
released a study this week with new Internal Revenue Service
(IRS) data showing that the tax share of top 1 percent has gone up;
i.e. the wealthiest American's are paying more:
"The top one
percent of tax filers paid 37.42 percent of federal personal income
taxes in 2000, the latest year for which data are available. The
2000 share paid by the top one percent (ranked by adjusted gross
income) reflects an increase from the 36.18 percent level posted in
1999. The 3.91 percent share paid by the bottom half of taxpayers
was virtually unchanged during this period..."
See Issues 2002
chapters for more: