The Case For An Across The Board Tax Rate Reduction

Policy Backgrounders | Taxes

No. 140
Wednesday, September 25, 1996
by Bruce Bartlett


Introduction

Federal taxes have reached their highest level in history. As of the second quarter of 1996, these taxes consume 20.8 percent of annual U.S. gross domestic product (GDP).1 [See Figure I .] Out of $7,547.6 billion in national output, the federal government claims $1,572.5 billion.

Annual GDP data go back to 1929. In only four of those 67 years were federal revenues as high as 20.5 percent of GDP, and three were war years.

  • Revenues reached 20.5 percent of GDP in 1943 at the peak of World War II.
  • They reached 20.6 percent in the first quarter of 1951 during the Korean War.
  • They reached 20.7 percent in the second quarter of 1969, when the Vietnam War surtax was in effect.
Figure I - Federal Taxes as a Percent of GDP

"Federal taxes are at their highest level in history."

The only other time federal revenues attained that level was in 1981, when they reached 20.7 percent of GDP in the first half of the year due to double-digit inflation that pushed people into higher tax brackets.

Figure II shows how the tax burden has increased over the last three years:

  • Taxes on corporations have increased 55.4 percent, or 3.5 times faster than GDP.
  • Personal income taxes have risen 24.3 percent, or 1.6 times faster than GDP.

Had corporate and individual income taxes increased only as fast as GDP:

  • Corporate taxes would have equaled $138 billion last year rather than the actual figure of $184 billion.
  • Individual income taxes would have grown to $555 billion instead of $598 billion.
Figure II - How Taxes Have Increased Since 1993

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