Soaking the rich has never worked and it never will — reality is not optional

From an editorial in the Examiner today:

Tax revenue as a percentage of gross domestic product is currently at historic lows. In 2011, the federal government ate up 15.4 percent of the U.S. economy in taxes. That was up from 15.1 percent in both 2010 and 2009, which were post-1950 lows. The reason is that we’re in the weakest economic recovery since World War II. As the economy improves, tax collections will grow, but history indicates there is an upper limit as to how high they will get.

…the top marginal rate on personal income was 91 percent in the 1950s and in the early 1960s. Taxes as a percentage of GDP never rose above 19 percent, and in fact fell as low as 14.5 percent.

There have been several previous posts on this blog recounting the evidence that the government cannot, try as it might, extract more in taxes from the American economy than about 19% of GDP. The highest it has ever been is 20.6% in 2000. When taxes rates went up under Bill Clinton tax revenue as a percentage of GDP went down. Later, when the capital gains and dividend rates were lowered revenue as a percentage of GDP went up slightly.

Obama has increased spending to 25% of GDP. Tax revenue will never sustain that, and there is no tax increase on the rich that will ever change this. Reality is not optional.

All one need do to understand this phenomenon is to realize that there are two tax rates that will produce zero revenue to the government, a rate of 0% and a rate of 100%.  At both these rates tax revenue to the government will be zero.  No one will work or invest or do anything at all to produce income that will be taxed at 100%.  Then, one need only realize that the optimal tax rate, which will produce the most revenue to the government, is somewhere in between.  The optimal rate is a lot closer to zero than it is to 100%.  It’s probably at about the same rate as the limit on revenue as a percentage of GDP, namely 19%.  At that rate revenue will still be about 19% of GDP, and revenue will be very high compared to historical norms because GDP will also be high.  In this scenario, if a responsible government kept its spending to around 16% of GDP the total national debt would start to be reduced year by year.  The American economy would be robust year after year and the business cycle would be reduced to an occasional blip.

Democrats can’t allow that to happen because there would no longer be any reason to vote for them. Nobody would need free Obama phones.

See these previous posts:

Hauser’s Law: why Obama’s war on the “rich” won’t help the economy

Revenue of 19% of GDP won’t sustain spending of 24% of GDP

 

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