28 March 2011

Taxes Fall Outside of Historic Range - But are Still Too High

Like a murder of crows, politicians and talk show hosts endlessly caw about the debt as a consequence of rampant government spending. Usually in the same breath, they decry high taxes. 

It's worth pointing out that - at the federal level at least - taxes have never been so low. Not just the lowest they've been in the lifetime of our president but outside the control charts set since his birth.

Companies use control charts to distinguish between common cause and special cause variation. Simply put, a control chart shows normal variation in a process. It can be applied to a factory floor to track defects, a high school to track dropout rates, or even to tax rates for a country. 

The control chart below shows tax rates as a percentage of GDP since 1961 - the year our president was born. 

Put simply, this suggests that any administration ought to be prepared for tax rates as low as 15.4% or as high as 20.8%. Taxes always varied within in this range. 

And then two things happened. One, the Great Recession lowered taxes. Two, and more importantly, conservatives finally institutionalized tax cuts as an annual rite, like virgins offered to the volcano. Obama, unable to end occupations in Afghanistan and Iraq but able to institute Universal Health Care, continued George W.'s blind adherence to cutting taxes no matter what spending was required. 

Do we have record deficits? Yes. And spending does play a part in this. But the part that every politician and the media seem to blithely ignore is this: taxes have plummeted below their old range. Not just their lowest, but lower than any reasonable prediction would have suggested even four years ago. 

I could opine at length about this. For now, I'll just point out these facts. You consider whether there is a good reason to believe that the lowest federal tax rate in all the developed world should have suddenly fallen to a new,and even lower range. 

1 comment:

Anonymous said...

The chart would be far more relevant if it showed tax revenue as a % of private sector GDP (GDP minus government spending). As of now it is lacking significance.