Natural Limit on Federal Revenue

It is a good thing that we do not get as much government as we pay for. - Will Rogers

A new graph is making the rounds on conservative sites showing that regardless of changes in the tax law, 

"From 1930 to 2010, tax revenue collection in the United States has never topped 20.9%, averaging 16.5% of GDP over these 80 years. ...
During the time period examined above, the rate of income taxation on the highest earning Americans has fluctuated drastically, from 25% of income in 1930 to 92% of income in the early 1950’s. Despite these vast differences in these top marginal rates, the total percentage of GDP that the federal government has collected in revenue has changed little."

Green line = tax revenue collected as % of total income

Politicians at all levels, city, state, federal, believe that deficits can be fixed by raising tax rates. But history shows that those individuals paying the most taxes find ways to shelter their earnings so total tax revenue rarely goes up and sometimes even falls. You may say, "well then, close the loopholes", but then new loopholes are found. Don't forget that most Congressmen and Senators are very rich and want loopholes for themselves. And in today's global economy, if US taxes become too high, it's not that difficult to move your business out of the country.

Analyst Veronique de Rugy, who created the graph above, says, "In recent years, spending, not revenues, has deviated from its historical path; spending must be addressed to rectify the budget."  A few weeks ago I mentioned the Wall Street Journal story, A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending. Estimated projections of new tax revenue results in politicians increasing spending even more - with disastrous results when these projections fall short of reality. In California, a recent report shows that cities and counties will have to pay 55% more to the state for at least 19 years to cover pension expenses; the tax revenue currently collected is far below expectations.

Bottom Line

With politics there is never a time to cut the budget. When times are good and revenue is high, money is allocated to higher civil servant salaries and pensions, and new programs are created for the poor and middle class. When times are poor, it is unthinkable to cut programs for the poor who are most in need (they need even more money!) and there is no way to cut back on civil salaries which are fixed by contract. Obama recently proposed a two year freeze on federal salaries and there were many objections from the left on how horrible this would be! A federal commission to reduce the deficit heard from many organizations - each said, "Yes the government spends too much and must cut back, but not with us, we are essential."aBack in August I wrote about the Laffer Curve, the idea that beyond a certain point, higher taxes lead to greater tax evasion and the net result is less tax revenue collected. This has been observed in states like NJ and Maryland which raised taxes on the rich, only to have them leave the state, and the total tax collection fall. See Actions have consequences.