Does Taxing the Rich Help Increase U.S. Revenue as a Percent of GDP? (Historic Range: 1934 to 2011)

Does increasing the top marginal tax rate on the rich help the U.S. Revenue Problem?

In the chart above, the lower green line is the U.S. Revenue as a Percentage of GDP from 1934 to 2011.  From 1944 to 2011, the Average U.S. Federal Revenue as a Percentage of GDP was a steady 17.8% with the highest being 20.9% of GDP in 1944, during World War 2.  From 1944 to 2011, the U.S. Revenue as a Percentage of GDP remained in a relatively constant narrow band, despite the large range of tax rates during this time.  (Different Tax Rate Graph from VisualizingEconomics.com and PolicyGrinder.com)

The upper red line is the top marginal tax rate.  Despite the large changes in the top marginal tax rate (from 92% in the 1950s to 28% in the 1980s), the U.S. Revenue as a Percentage of Gross Domestic Product remained relatively constant.

From 1950 to 1963, the Top Marginal Tax Rate averaged between 91 and 92%.  The U.S. Revenue as a Percentage of Revenue during this time was 17.4%. 

From 1988 to 1989, the Top Marginal Tax Rate was 28%.  The Revenue as a Percentage of Revenue during this time was 18.3% (even higher than the 1950 to 1963 time period).

This observation of a steady U.S. Revenue as a Percentage of GDP is often called Hauser's Law.

Chart created by this techfarm.blogspot.com site, and data from the Tax Policy Center.

Does the U.S. have a Spending or Revenue Problem? US Debt and Deficit

Does the United States have a Revenue Problem or a Spending Problem?

Since 1960, the United States has been on a Spending Trajectory, and the annual deficit over the last four years has been over $1 Trillion Dollars.

The Current U.S. National Debt is around $16 Trillion, and it is now over 100% of GDP (Gross Domestic Product).

But is it a U.S. Spending Problem or a Revenue Problem?

In the chart above, we see Spending and Revenue as a Percentage of GDP. 

Revenue since 1960 has remained in a narrow range of GDP and averages 18.1% over that time.  In that time, even if tax rates vary significantly, the Revenue has stayed in this narrow range with an 18.1% of GDP average.

Spending, on the other hand, has averaged 20.2% of GDP.  Since the Government can continue to borrow (with the Federal Reserve printing money), and since Government can continue to spend without any solid limit, you can easily forecast spending to continue growing.  When you consider a bulk of those annual payments goes to Social Security, Medicare and Medicaid, and since the U.S. Population is Aging and the Baby Boomers are starting to retire starting in 2011, you can imagine spending to continue to increase as a percentage of GDP.

So with Spending continuing to increase as a percent of GDP, and Revenue remaining a relatively constant 18% of GDP, you can see how the U.S. Debt Problem can grow year after year to create a crisis economic situation possibly leading to long term decade or multi-decade economic stagnation, or recession or depression.

The Problem the United States is having is a Spending Problem and not a Revenue Problem.

The Data:

Charts were created by this site, and Heritage.org, and data from the Congressional Budget Office.
The Spending and Revenue Chart above is based on the CBO's 2012 Long Term Outlook report, using the Externded Alternative Fiscal Scenario, Table 1-2.