Tax rates, growth, and tax revenues

by cactus

Together with a co-author, I’ve been working on a book looking at how a number of series – everything from economic growth to abortion rates – have evolved over the length of each administration beginning with Ike. The process is starting to move, we’ve gotten ourselves an agent, and we hope to have a book deal soon. (I have no idea how long this process takes.)

Its been interesting, and I’ve learned a lot. Perhaps the biggest thing I’ve learned is that you have to rewrite and rewrite and rewrite, and you have to keep looking for ways to present the same material. One thing I’m particularly interested in (and long-time readers may recall this from when I was regularly writing posts here at Angry Bear) is the issue of taxation and how it affects other things like growth or tax revenues. For example, that was covered here.

Naturally, that’s a topic I couldn’t avoid in the book. But many folks here at Angry Bear (Divorced One Like Bush and Dan especially, but many more) kept telling me I had to have simpler and clearer ways to get the information across. I think I’m getting there. So I’d like to share two graphs from the manuscript.

The first one looks at annualized changes in the actual tax rates and the annualized changes in the growth or real GDP per capita. Yes, actual tax rates. None of that silly marginal tax rate nonsense. My first job was at a Big Accounting Firm, and if there’s one thing I learned, its that nobody who can afford Big Accounting Firm hourly fees pays anything resembling marginal rates. I also learned that enforcement makes one heck of a difference. Fortunately, right on the internet, the IRS provides data on the actual amount we all pay in taxes as a share of personal income. That’s the actual rate. The rest is theoretical fluff.

Another thing, before I put up the graph – the annualized changes are calculated from the last full year before each administration took office until their last full year in office. Thus, we get to see how much each President increased or decreased a series from what it was when their predecessor was in charge.

(To save time – I know the same arguments that have been dispensed with twelve times are going to come up – let me refer any critiques here, where many of the usual objections are dealt with.)

Here’s graph 1:

The usual Republican talking point is that cutting taxes produces faster economic growth. If you see it in the chart, let me know. And if you insist on giving Reagan credit for the growth rates from 1992 to 2000, be sure to give him credit for the growth rates from 1988 to 1992 as well.

The second graph looks at annualized changes in the actual tax rates and the annualized changes in real taxes paid rate per capita. Here, the idea is that cutting people’s taxes could lead people to pay more taxes. The Laffer curve and all of that. And yes, I know these days some on the Republican side will tell you “nobody really believes that.” I would suggest they ask Mr. McCain whether he believes it and then get back to us.

Again, if what I’m supposed to see is in here, someone please point it out. But to be honest, I’m simply not seeing any way to reconcile Republican talking points on taxation with the real world.

A few final points:
Data for the actual tax rate is here.
Data for real gdp per capita and population is obtained from NIPA Table 7.1
Data for real tax collections comes from OMB Table 1.3.
I’ve also downloaded all the data and links into this Google Spreadsheet.
by cactus