Will Higher Tax Rates Balance the Budget?
Professor Antony Davies, Duquesne University, explains why higher tax rates won’t help to balance the budget in this short video.
Here are the points that Professor Antony Davies makes.
The federal government has increased the amount of tax revenue it has collected over the last fifty years. That is because our economy and population has grown over that time period, as has inflation.
A more useful way to analyze tax revenue is to track tax revenue as a percentage of GDP. Each year the government takes a slice of the economy for itself. How big is that slice? That is what percentage of GDP shows. Over the past fifty years, the government’s slice of the pie (percentage of GDP) has been about 18%.
During periods of budget deficits, some politicians call for raising tax rates. Is this effective? In the 1950s the top income tax rate was 90%. It fell to 50% in the 1960s to the 1980s. During this period the government’s slice of the pie (percentage of GDP) was 17%. In 1987 the top tax rate was lowered to 39%, then later to 28%, then back up to 40%, then down to 35%, where it is today. During this period the government’s slice of the pie (percentage of GDP) was around 18%.
The conclusion? It doesn’t matter whether the tax rates on the rich are high or low. The government’s slice of the economic pie stays about the same. The same applies to average income tax rates (not just top rates), capital gains tax rates, and corporate tax rates.
What is the lesson? If we really want to balance the budget, we need to grow the economic pie, not determine how to take a bigger slice. The bigger the economic pie grows, the more tax revenue the government gets. 18% of a large pie is more revenue than 18% of a small pie.
How do we generate a bigger economic pie?
- Lower tax rates
- Simply the tax code