In yesterday’s article, Hitting the Debt Ceiling is Not the End of the World, I wrote, “Every statistic imaginable shows this is not a tax revenue problem, it is a spending problem. Perhaps in another column I will lay that case out in more detail, but for now, everyone without a partisan ax to grind knows we could tax 100% of this country’s production and all it would do is drive tax revenues to zero.”
Tax Revenue as a Fraction of GDP
The thing that stands out to me from the chart above is the relative stability of tax receipts over the past nearly 50 years. The federal government has collected between 15%-20% of the nation’s Gross Domestic Product every year since 1960. That’s pretty remarkable given the wild changes in marginal tax rates and income distributions we’ve seen over the same period (not to mention all the booms and busts). When normalized with GDP, it’s hard to argue that there is any secular trend higher or lower over this time.
In another post entitled Government Expenditures as a Fraction of GDP Engebreth has this chart showing the rise of expenditures as a percentage of GDP:
Government Expenditures as a Fraction of GDP
His most interesting comment was:
We may not be as productive as we think we are with the argument that new marginal dollars spent by the government are less productive than previous dollars spent. He is not demonizing or arguing against government spending here, he’s simply saying that there is, on average, less economic return on a dollar spent by the government as the amount of government spending increases.
He also went on to show that when you factor out the rise in government expenditures, real private sector GDP has not grown as much as reported.