NCPA - National Center for Policy Analysis

The Tax Burden May Be Overstated

May 1, 2000

Why do Americans appear uninterested in tax cuts despite taxes being at record levels? One possible explanation is that the data make the tax burden appear heavier than it actually is.

The true tax burden may be misrepresented due to the asymmetrical way capital gains are treated for tax purposes and in the National Income and Product Accounts.

In 1997, the federal government took in $79 billion from taxation of capital gains. However, capital gains are not included in gross domestic product (GDP). Thus when we calculate taxes as a share of GDP, we include taxes on capital gains but not the gains themselves. This makes GDP smaller and the tax burden appear heavier than it actually is.

Capital gains are not actually income in an economic sense. They simply represent the revaluation of assets and are not a flow of goods or services, which is what GDP measures. This distorts the measure of taxes as a share of GDP

  • In 1997, $338 billion of realized capital gains upon which taxes were paid were excluded from GDP.
  • Inclusion of this income in GDP would have lowered federal taxes as a share of GDP from 19 percent to 18.3 percent, a significant reduction.

Moreover, as capital gains have grown as a share of taxable income and taxes on capital gains have become a larger source of federal revenue, the distortion has grown.

  • In 1980, only $27.1 billion in capital gains were excluded from GDP and the gap between taxes as a share of GDP with and without capital gains was just 0.2 percent.
  • Since then, capital gains have grown more than 12-fold, while official GDP has risen just 3-fold, thus increasing the gap to 0.7 percent.

While this may not fully explain tax cutting's lack of popularity, it may be an important factor.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 1, 2000.


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