You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
> The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
I don’t think this is correct. Yes, the economy is complicated. No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit. A claim that cutting taxes won’t increase the deficit constrains you to make other claims according to the GDP = C + G + I + X equation, and we should demand that lawmakers be specific about those claims.
As I pointed out, the chart is not really flat. The line actually goes up and down.
> You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
Great point, but it increased again in 2019. In fact, inflation adjusted tax revenue has been increasing (with minor transient dips) throughout history[1]. You'll definitely find one-off variations, but the trend-line for inflation-adjusted Federal tax revenue is up-and-to-the-right.
> No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit...As I pointed out, the chart is not really flat. The line actually goes up and down.
It's complicated because the ups and downs don't perfectly correlate with tax policy. You can find moments where a decrease in tax revenue as a % of GDP coincide with a tax cut, but you can also find moments where a decrease in tax revenue as a % of GDP coincides with a tax hike and vice versa.
It's important because if you zoom out and look at Federal tax brackets over time since WW2, the US's inflation adjusted tax brackets went from 22%-92% in the 1950's[2] to 10%-37% in 2020[3], but Federal tax receipts as a % of GDP is flat / moderately increased over that period.
I think the long-term historical drop in the ratio of [top marginal rate on individual income] to [tax as a % of GDP] is mainly the result of these factors:
1) increased tax compliance
2) more tax deductions
Overall, you’d need to use a more comprehensive “area under the curve” analysis of every tax to predict the impact of tax policy on total tax revenue, and it would be surprising if it could be predicted based only on the top marginal rate.
A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
It's not just the top marginal tax rate. The full bracket has fallen across the board, not just on the top marginal income tax payer.
> A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
Yes, which is why it's tough to suss anything out from the minor variations between consecutive years, and it makes a little more sense to look at a longer time horizon.
> The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
I don’t think this is correct. Yes, the economy is complicated. No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit. A claim that cutting taxes won’t increase the deficit constrains you to make other claims according to the GDP = C + G + I + X equation, and we should demand that lawmakers be specific about those claims.
As I pointed out, the chart is not really flat. The line actually goes up and down.