Taxes and Private Sector

by cactus

Regular readers know that (together with a currently un-named co-author) I recently wrote a book looking at how Presidents performed on a wide range of issues, everything from abortion to the economy. The book is currently scheduled to come out next year (more info as it becomes available), and I’m playing with ideas for a second book right now. Not a sequel since what I have in mind is very, very different, but I think there’s something to be said about looking at how things change over the length of a presidential administration as it kind of smoothes out bumps.

Think of it this way – even the most law and order president might decrease spending on law enforcement from, say, year five to year six of his administration, but you can bet that such spending over the length of his administration will increase. Even Reagan raised some taxes, after all.

And since I mentioned St. Ronald, I’d like to focus this post on an issue near and dear to the heart of folks who like to invoke his wisdom – the importance of taxes when it comes to providing incentives to the private sector. See, raising taxes causes the producers, the folks who make things happen (as opposed to losers like you and me) to retreat, armadillo-like, into their underground Galtian burrows in the sky. The end result is that the economy tanks and we all starve to death. That’s why economic disasters never start during Republican administrations.

So let’s take a jog with this puppy, shall we?

And before we lace up, a note – everything you’re gonna see below is in a Google spreadsheet you can access here. It also contains links to all the data I’m using, which come from a few Bureau of Economic Analysis (BEA) National Income and Product Account (NIPA) tables and a CPI table provided by the Bureau of Labor Statistics (BLS). I’ve also included links to all the data sources used in this post directly below.

A second thing to note before we set out – it’s easy to cheat on GDP. GDP includes Government Spending, so an irresponsible administration can artificially goose GDP simply by borrowing a fortune (thus making the national debt explode) and spending the money. In the past, I’ve dealt with this a number of different ways, but today I want to focus on the private sector.

We can pull the government consumption and expenditures (NIPA table 1.1.5, line 21) out of GDP (NIPA table 1.1.5, line 1), giving us something we can describe as the “private sector component of GDP.” Next, we can divide the amount the government collects in taxes (NIPA table 3.1, line 2) at all levels – federal, state and local – by the private sector component of GDP. (Both the private sector GDP and the tax collections are in nominal dollars, and all we’re interested in is the percentage, so this is tres kosher.) That gives us the percentage that the private sector (at all levels, from the lowliest panhandler to the most magnificent maharajah in the business world) pays in taxes in each year. If it isn’t obvious, there’s no point in including the government portion of GDP there since the government doesn’t pay taxes.

Since we’re interested in growth, we can adjust the private sector component of GDP for inflation – might as well put it in 2005 dollars, since when the BEA adjusts for inflation, these days that’s their base year.

With all of that, we can produce the following graph. (A reminder – all the data is in the referenced Google spreadsheet.)

FYI, since Ike took office, only three administrations (JFK, LBJ and Clinton) increased the percentage of the private sector GDP that goes to taxes; they make up three out of the four administrations with the fastest increases in the annualized real private GDP. Regular readers also may recall those are the three administrations with the fastest annualized increases in real GDP per capita, including the government portion of the festivities. (Regular readers may also recall I get very irritated when someone starts blathering about the “Kennedy tax cuts” without a. realizing that the so-called Kennedy tax cuts occurred while LBJ was in office, and b. one can cut marginal rates and increase enforcement at the same time, which is what happened. If you’re going to argue something in comments about the Kennedy tax cuts, please stick to what the data says and not what Glenn Beck tells you.)

The annual average increase in real private GDP is about 2.4% for administrations that cut share of private sector GDP going to taxes, and 4.2% to the administrations that increased it.

Go figure. Now, I dislike paying taxes as much as a Glenn Beck does, but the story line about big bad taxes choking off the private sector doesn’t add up. The “biggest government” president in our sample was LBJ with his Great Society and War on Poverty, and he’s the guy under whom the private sector grew the fastest. JFK was second on both counts. The reason is, without the government, and the taxes that fund it, there is nobody to build roads, provide a decent legal system or combat epidemics, and without things like this, the private sector grinds to a halt, the efforts of Anthony Mozillo and Paris Hilton notwithstanding. Which brings up one other thing – the argument you often hear is that the private sector is more efficient because of the profit motive and the fact that inefficient private parties go bankrupt. Of course, in the real world, inefficient private parties peddling silly ideas can do as well or better than their quality counterparts. The graph above contradicts everything you will ever hear or read in a Rupert Murdoch owned property, but Murdoch is in no danger of going under. Nor will his great, grand-children, even if they continue selling something that isn’t true for generations.

Now, in case you’re wondering, I generally start these sorts of analyses with Ike though data runs to 1929 because events like the Great Depression, World War 2, and the recovery from World War 2 tend to distort things. For instance, during World War 2, the private sector’s share of the economy was (purposely) reduced dramatically given that fighting the Nazis and the Empire of Japan was the main preoccupation for most people. Conversely, during Truman’s term, the pent up private sector demand bounced back.

However, if you’re interested in what that looks like, I’ve included the data going back to 1929 (as far as it will go) in the spreadsheet, and I’ve done the analysis going back to FDR’s first term. The analysis for the growth in real GDP itself (i.e., not just private GDP) is there.

Reminder: the spreadsheet is here.
Data sources..
Current Tax Receipts: NIPA Table 3.1
GDP and the Gov’t piece of GDP: NIPA Table 1.1.6
CPI – U: BLS Table

Well, that’s it for now. All y’all shalom ‘til next time.
by cactus