Thursday, December 2, 2010

Can Government Raise Taxes To More Than 19% Of GDP?

Veronique De Rugy thinks not.

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. This comes despite the drastic historical fluctuation in the rate of taxes on the wealthiest Americans. As we move toward debt reduction, it is critical to keep the long-term path of the United States in mind.

But, I'm not so sure.

I do agree with her that raising the top marginal rates as well as taxes on capital won't raise much additional revenue -- the well-to-do are famously able to maintain their living standards and adjust their incomes to get around those. But, there is one way to increase the government's take: raise taxes on the poor.

It's something we never talk about. Since Reagan's tax cuts in the early eighties, our entire conversation has centered around tax cuts "for the rich". In the meantime, though, the percentage of Americans spared the burden of income taxes has grown to almost 50.

That's an awful big chunk of the population which contributes little or nothing to Washington's insatiable hunger for money.

Now, I think that raising income tax rates on the poor will forever be a non-starter in this country, but why do you suppose there has been all this talk of a value-added tax? Because it would raise a lot of money from those lightly-taxed, lower-income people.

It's a sales tax in effect, and the poor cannot cut their consumption appreciably. The imposition of a VAT could very well raise the percentage of tax revenue to over 20% -- and beyond. Just a 1% VAT could, even at current depressed levels of consumer expenditures, raise about $10 billion.

For those who just cannot imagine cutting federal spending, that must be a tempting prospect, indeed.

H.T. Instapundit

[UPDATE:] Nick Gillespie agrees with De Rugy.

It's a simple, plain, and nearly universally unacknowledged fact that the feds haven't been able to raise revenue much past the 19 percent of GDP bar for any period of time since World War II. Doesn't matter the the top marginal rate is, or the bottom, or nothing. The government is going to pull in just under 19 percent maximum. Some years it might be a bit higher and some a bit lower, but it ain't budging over the long haul (defined as the last 60 or so years).

Now, please, don't get me wrong -- I do not advocate an increase in income taxes and I think a VAT would open the governmental Pandora's Box of future tax abuses. But I am not sanguine that 19% of GDP is somehow the magical, mystical upper limit of tax revenue that Washington can squeeze out of us.

This is the wrong argument against tax increases.

How about, instead of statistics, we try principle.

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