JONATHAN CHAIT NOVEMBER 29, 2010
Ubiquitous libertarian anti-tax pundit Veronique de Rugy pulls out the old hackneyed Republican line that tax revenues can't go above 19 percent. She even has a chart!
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Democrats still think they will be able to raise more revenue by letting marginal rates go up. But that ignores the fact that the federal government has never been able to get much more than 19 percent of GDP in tax revenues, no matter how high the top marginal tax rate goes. Consider this chart:
It shows the historical path of federal taxation as a percentage of GDP (using the earliest records available from the OMB) alongside top-marginal-tax-rate data from the Tax Policy Center. From 1930 to 2010, tax-revenue collection in the United States has never topped 20.9 percent, averaging 16.5 percent of GDP over 80 years. This despite the drastic historical fluctuation in tax rates on the wealthiest Americans.
I've seen versions of this dating back two decades. Part of the scam is a simply visual trick familiar to anybody who read "How To Lie With Statistics" -- you scale the chart to make a major change appear tiny. De Rugy's chart, one which the scale of federal tax revenue goes from an absurd o to 100, seems to show little change, thus proving the supply-side claim that increasing marginal tax rates is self-defeating. Here's a chart showing the range of revenue within a reasonable scale:
As you can see, the swings are fairly dramatic. De Rugy's chart purports to show that reducing the top marginal tax rate produced no real change in revenue. But of course the first Reagan tax cuts in 1981 caused revenue to plummet. The top marginal tax rate was also reduced in 1986, but that was accompanied by equally large reductions in tax expenditures, and the whole reform was not designed to reduce revenue.
Meanwhile, the tax hikes by George W. Bush and Bill Clinton -- which supply-siders claimed would not increase revenue -- were followed by a massive spike in revenue. And then the tax cuts by George W. Bush -- which supply-siders claimed would not reduced revenue by very much -- were followed by a massive, 5% of GDP drop in revenue, which receded to 2% of revenue at the peak of the 2000s economic cycle.