Taxes and Growth Rates – Two Graphs

This post is made up of two graphs and a few comments…

The first graph shows the annualized change in total individual income taxes paid (from the IRS Statistics of Income) as a percentage of personal income for selected blocks of years. The data comes from the IRS.

I know what you’re thinking… you’re wondering – weren’t there tax cuts in the early 1960s? And weren’t taxes raised between 1988 and 1992? Well, as I mentioned many times… there are two ways to cut taxes – one is to cut tax rates, and the other is to cut enforcement. Presumably, there are also two ways to raise taxes. And presumably, you get more compliance through enforcement than by writing rules and regulations.

The second graph shows the annualized change in real GDP per capita for the same selected blocks of years. Data comes from the BEA’s NIPA Table 7.1.

A few comments:

1. I don’t think many readers would argue that its a sheer coincidence that the red bars behave one way and the blue bars behave a different way in the first graph. And yet, over the past year, every time I’ve put up a variation of the second graph, that’s exactly the argument that comes up – its a coincidence!
2. Is it possible that the two graphs are related? Is it possible that the reason all but one of the red bars is below the 2% line and all of the blue bars are above the 2% in the second graph have something to do with the pattern we observe in graph 1? And if taxes hinder the economy… shouldn’t we see the opposite pattern in Graph 2?
3. If graph 1 is unrelated to graph 2, what explains graph 2?

Update. It hasn’t been a good 12 hours… I corrected item 2, which originally read the opposite of how it should. Thanks to reader k harris for pointing out the error.

Update 2. Grammatical correction in point 1 – thanks to Tom Mullins for pointing out the error.