Higher Taxes Don't Mean More Revenue

The intelligentsia of the Democratic Party in the US is growing increasingly enthusiastic about raising the highest federal income tax rates to 70 per cent or more. This is ostensibly with the intent to raise new revenue so federal spending could supposedly remain well above 24 per cent of gross domestic product (GDP) rather than be scaled back toward the 19 per cent average of 1997-2007, says Alan Reynolds, a senior fellow with the Cato Institute.

All this nostalgia about the good old days of 70 per cent tax rates makes it sound as though only the highest incomes would face higher tax rates.

In reality, there were a dozen tax rates between 48 per cent and 70 per cent during the 1970s.

Moreover, the individual income tax actually brought in less revenue when the highest tax rate was 70 per cent to 91 per cent than it did when the highest tax rate was 28 per cent.

When the highest tax rate ranged from 91 per cent to 92 per cent (1951-63), even the lowest rate was quite high – 20 per cent or 22 per cent.

However, those super-high tax rates at all income levels brought in revenue of only 7.7 per cent of GDP.

Since the era of 70 per cent tax rates, the U.S. income tax system has become far more "progressive."

Congressional Budget Office estimates show that from 1979 to 2007 average income tax rates fell by 110 per cent to minus 0.4 per cent from 4.1 per cent for the second-poorest quintile of taxpayers.

Average tax rates fell by 56 per cent for the middle quintile and 39 per cent for the fourth, but only 8 per cent at the top.

Despite these massive tax cuts for the bottom 80 per cent, overall federal revenues were the same 18.5 per cent share of GDP in 2007 as they were in 1979 and individual tax revenues were nearly the same – 8.7 per cent of GDP in 1979 versus 8.4 per cent in 2007.

Source: Alan Reynolds, Why 70 percent Tax Rates Won't Work, Wall Street Journal, June 16, 2011.

For text: http://online.wsj.com/article/SB10001424052702304259304576375951025762400.html

For more on Tax and Spending Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=25

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 28 June 2011