Raising Taxes Cannot Solve the Problem of the Rising Federal Budget Deficit.

Once again the people at AIER (American Institute of Economic Research have put together an article that is easy to read, about economics, addresses a very important current issue, and is thought provoking.  Basically, tax increases above 20% of GDP are counter-productive.  The article is in italics.  From AIER:

Federal tax revenues have averaged 19.6 percent of GDP since World War II. As the chart above shows, federal receipts broke the 20 percent ceiling only once, reaching 20.6 percent during the tech boom of 2000.

This has led many economists to argue that it is irresponsible for the U.S. to make long-term commitments to expenditure levels above about 20 percent of GDP. Nonetheless, government expenditure was 25.5 percent of GDP in 2011 and is projected to be more than 24 percent this year.

The 20 percent ceiling for government revenue holds despite a wide variation in tax rates. In the postwar period, the highest personal income tax rates have been as high as 92 percent and as low as 28 percent, while corporate tax rates have ranged from 35 to 53 percent.

This means that raising taxes to address mounting U.S. debt is not an option. While it may seem fair politically, it is unrealistic and counterproductive in practice.

At some point, apparently around 20 percent of GDP, increased tax rates are offset by shrinkage in the tax base.

Individuals and businesses postpone income, find tax shelters, move assets offshore, and hire armies of accountants and lawyers to protect their income. Some even move to lower-tax countries. Higher taxes can also slow economic activity by reducing the personal rewards for working, innovating, and investing.  If a 25 percent increase in the tax rate is met by a 25 percent decrease in whatever the government is taxing, the country does not gain tax dollars.

Higher taxes have succeeded in increasing government revenue in small, homogeneous countries such as Sweden and Finland. With the large, diverse, and often fractious population of the U.S., it just doesn’t work. The history of U.S. taxes and spending shows that once expenditures rise above 20 percent GDP, no level of taxing will pay for it.