Wednesday, July 13, 2011

Good diagnosis and bad arguments on taxes

Ezra Klein refers to Martin Wolf's astonishment at the tax debate in the US:

The astonishing feature of the federal fiscal position is that revenues are forecast to be a mere 14.4 per cent of GDP in 2011, far below their postwar average of close to 18 per cent. Individual income tax is forecast to be a mere 6.3 per cent of GDP in 2011. This non-American cannot understand what the fuss is about: in 1988, at the end of Ronald Reagan’s term, receipts were 18.2 per cent of GDP. Tax revenue has to rise substantially if the deficit is to close.

This is quite misleading. One big story of the recession is that tax revenues dropped drastically. It's hard to compare this year's share of tax revenues to "the Reagan years" or to the post-war average. Jared Bernstein has something similar:

 Tax revenues are at their lowest as a share of GDP, but once again, the economy still is far below capacity...One better comparison is with tax revenue and government spending in the last recession, in 2001. Via...Ezra Klein:
 In 2001, revenues were at 19.5 percent of gross domestic product and spending was at 18.6 percent of GDP. That was our surplus. In 2010, revenues were at 14.9 percent of GDP while spending was at 23.9 percent.
The right comparison would actually be to consider the revenues if taxes were held at today's level(what the Republicans want), in a "normal economy". So one possibility is to look at historical tax rates and see if today's are far below historical levels(and be careful of the loopholes).  You can also compare the rates with other countries
 For instance, the top marginal tax rate
Jared Bernstein had a nice comparison or corporate income tax rates between the US and other countries, and over time
Because I am on my old computer (and so it takes hours to connect to a website and find pictures), I'll stop there for now, but a little bit of googling will show you that the tax rates are usually at historical lows. This means that Ezra, Jared and Martin are right, but the tax revenue number as share of GDP is, in my opinion, the bad way to frame the argument.

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