NCPA - National Center for Policy Analysis

Revenues Grow Faster Than Economy

May 6, 1996

Individual and corporate income taxes could have been cut substantially last year and government revenues would still have grown at the same rate as gross domestic product (GDP), analysts have found. Since taxes weren't cut, they took an increasing proportion of GDP.

  • In 1992, total taxes -- federal, state and local -- as a share of GDP were 30 percent.
  • Due to federal tax increases, the share rose to 31.3 of GDP in 1995 -- the highest in history.
  • Since GDP has only risen 16 percent since 1992, personal taxes have risen 1.6 times faster and corporate taxes 3.5 times faster than GDP over the last three years.

What this means is that income taxes could have been cut by 7.3 percent and corporate taxes 25 percent last year and revenues would not -- relative to GDP -- have suffered.

  • If total receipts had grown at the same rate as GDP, they would have come to $1,390 billion last year -- $88 billion less than the actual total of $1,478 billion.
  • Thus, we could have cut taxes by $88 billion and gross federal receipts would be about the same as if they had grown at the same rate as GDP since 1992.
  • If the tax cut were given only to individuals, it would have amounted to a 15 percent rate cut across the board.

This vast increase in federal taxes is the result of two factors: the 1990 and 1993 tax increases and the effect of progressive tax rates. While rates are indexed to inflation they are not adjusted for real growth in the economy.

Analysts conclude that even without legislated tax increases, taxes must be cut periodically just to keep the tax burden from rising.

Source: Bruce Bartlett (National Center for Policy Analysis), "Tax Cuts Without Revenue Overbite," Washington Times, May 6, 1996.

 

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