Paul L. Caron

Tuesday, February 8, 2011

AP: Taxes (as a Percentage of the Economy) Are Lowest in 60 Years

Associated Press, Taxes (as a Percentage of Economy) Drop to Lowest Level in 60 Years:

Taxes too high? Actually, as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way. And for the third straight year, American families and businesses will pay less in federal taxes than they did under former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for the wealthy and poor alike.

Income tax payments this year will be nearly 13% lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office. ...

"The current state of the tax code is simply indefensible," says Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "It is hemorrhaging revenue." ...

[I]n the third year of Obama's presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3% this year. But federal tax revenues won't rebound to pre-recession levels until next year, according to CBO projections.

In the current budget year, federal tax receipts will be equal to 14.8% of the Gross Domestic Product, or GDP, the lowest level since Harry Truman was president. In Bush's last year in office, tax receipts were 17.5% of GDP, just below their 40-year average.

The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.

(Hat Tip: Francine Lipman.)  The article, however, omits the CBO's projection that, as the economy recovers, taxes (as a percentage of the economy) will surge to post-World War II highs (principally due to record individual income tax collections):

CBO Chart 1 
CBO Chart 2

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The other quirk about GDP is that, incredibly, government spending is counted as part of GDP. When government spending rises, so does GDP, all other things being equal.
Someone ought to be advocating a change in the methodology for calculating GDP. It's inappropriate for government spending to be included. What's the "product" produced by the government?

Posted by: Frederic Bastiat | Feb 8, 2011 7:08:24 AM

Has anyone corrected the GDP figures used for this analysis by taking into account government spending increases over this period? Increased government spending into the teeth of a recession would, by design, cause this kind of percentage drop because the spending is intended (Keynsian-wise) to REPLACE private spending which (along with tax payments) is considered lower than normal.

Posted by: Matt E | Feb 8, 2011 6:54:04 AM

Well, yes, Federal tax receipts are down -- at the moment -- due to the recession, and it doesn't take much of a crystal ball to predict that as the economy improves, so will Uncle Sam's take.

But the not-so-subtle premise -- that the total tax burden is too low -- is bunkum. The AP likes to conflate "tax burden" with "income tax," which conveniently ignores the thousands of smaller by-any-other-name bites. Like *state* taxes, for example. And hidden taxes. I've tried to compile a list of the hidden taxes we pay every day; I've concluded I won't live long enough.

Why is it that post WW2, a middle-class father could support a family of four on his salary alone, when today that's damned near impossible? Is the problem on the income side, or the outgo side?

Taxes are like army ants: individually they're small, but collectively they eat us alive.

Posted by: Paul in NJ | Feb 8, 2011 6:52:04 AM

The CBO's long-term outlook for tax collections surging to post WW2 highs is elevated for the following reasons:

"For example, if most of the provisions in the 2010 tax act that were originally enacted
in 2001, 2003, and 2009 or that modified estate and gift taxation were extended (rather than allowed to expire on December 31, 2012), and the alternative minimum tax was indexed for inflation, annual revenues would average about 18 percent of GDP through 2021 (which is equal to their 40-year average), rather than the 19.9 percent shown in CBO's baseline projections."

Which, of course, is in keeping with Hauser's Law.

Posted by: Ironman | Feb 8, 2011 6:48:16 AM

The proximate cause of the projected increase in revenue isn't the economy, but the expiration of the Bush/Obama tax cuts. As the CBO notes, "Of the projected jump in tax revenue...individual income taxes account for about three-fifths; the increase in those receipts stems mostly from scheduled changes in law...."

Posted by: jpe | Feb 8, 2011 6:38:50 AM

Well AP as usual forget Gov, State Debt which is future taxes. Neither talks about "taxes" desguised as fees.

Posted by: LL | Feb 8, 2011 6:15:25 AM

Also, they include all the tax credits. That's just welfare, not taxes. May as well run all the subsidies through the tax code--that would really lower taxes, and since spending must equal revenue, it would lower spending, too. Lowest taxes, smallest government in history. Thanks, AP.

Posted by: Mike | Feb 8, 2011 6:13:39 AM

Uh, but the government budget as a share of GDP is at all-time, or near all-time highs. Sooo, are we supposed to be happy that we have record budget deficits?

Posted by: Josh | Feb 8, 2011 4:46:17 AM