by Mitch Kokai
Senior Political Analyst, John Locke Foundation
If the federal government doesn’t have enough money to pay its bills, we ought to raise taxes to get more money, right? Those of you who responded “yes” ought to read Michael Barone‘s latest column, It examines the historical record for federal government spending and revenue dating back to 1939.
Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.
The highest number since then was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.
That’s just because tax rates are too low, Obama backers reply. Just raise the rates on high earners, and the problem will be solved.
Actually, high earners don’t make enough money to close the current budget deficit. You’d need to raise taxes on middle-income earners too.
But we have had higher income-tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates — like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s — have never produced federal receipts higher than 20 percent of GDP.
Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.
According to a Congressional Research Service study, the effective income-tax rate on the top 0.01 percent of earners in the days of nominal 91 percent tax rates was only 45 percent. Others have pegged it at 31 percent.