Are taxes too low?

President Bush has signed into law 15 bills cutting taxes. The 2001 and 2003 tax laws were the biggies. Here’s a list.

This President has a well-established record as a tax cutter. Many of our critics argue that we cut taxes too much, and that we need to repeal some or all of the enacted tax relief.

These critics claim that taxes are now “too low.” They argue that we should repeal all the tax cuts, or at a minimum, allow them to expire in 2010 as they are scheduled to do under current law. Others argue we should allow some of the tax cuts to expire, those which they label as “for the rich.” I’m going to stay away from distributional arguments today, and instead focus on the aggregate level of taxation: how much in total is the Federal government taking from the private sector each year?

Are taxes too low now? Are they low by historical standards?

historic revenues

What can we learn from this graph?

  • Federal revenues, measured as a share of the economy, have stayed basically flat since the end of World War II. They bounce around quite a bit, but the long-term trend is flat. Depending on when you start measuring, the average is a little above 18% of GDP. The green line is at 18.3% of GDP.
  • State & local revenues climbed steadily from the end of WWII until about 1972, and have crept up since then.
  • In 2009 under current law, the total federal + state + local tax take (on average) is 32.6%. That means governments are taking almost one-third of income and earnings from the people who produce them.

For comparison, the 2001 and 2003 tax cuts combined reduced the federal government’s take from the economy by about 1.2% of GDP.

Detour

Don’t forget that, while taxes have remained basically constant as a share of the economy since the end of World War II, this does not mean that government is the same size as it was 60 years ago. Government is much bigger, because our economy is much bigger.

Example:

  • In 2009, current law taxes were projected to be 18.7% of the economy before the stimulus bill.
  • In 1953, taxes were 18.7% of the economy.
  • But the 2009 economy is more than 4X as large as the 1953 economy, so the government is more than 4X bigger in inflation-adjusted terms.

A flat share of the economy […]