Does Tax Code Really Matter?

The answer is “yes” and “no.”  “Yes,” only if tax code affects GDP.  Otherwise “no.”

In the study of supply-side economics, the Laffer Curve is postulated as follows:

The Laffer Curve implies that there is some point between zero and 100 percent that will maximize revenue. … A more important lesson of the Laffer Curve is that there are always two tax rates that will collect the same revenue — a high rate on a small base and a low rate on a large base.

In graphic form, it looks like this:

was still very small, federal revenue was small compared to our country’s GDP at less than 5%.  During that time, most federal revenue came from customs duties and excise taxes.  That changed in the 1930s, when federal government exploded in growth under the Hoover and Roosevelt administrations trying to grapple with the Great Depression, which raised the top marginal income tax rate up to a peak of 79 percent.

Receipts surpassed 10% of GDP in the early 1940s and by late 1940s began stabilizing at about 17%.  Since then, federal revenue remains stubbornly at 17% plus or minus a standard deviation of 1.6%.

Brookings Institution.  Unfortunately, we must leave out the Trump and Biden administrations because Trump was cursed in his final year with economic collapse due to COVID shutdowns, for which Biden takes credit for “economic growth” when in fact it was just America getting back to normal.

Looking at net federal tax receipts (corrected by inflation to 1945 dollars) in various recent administrations reveals nothing terribly remarkable except for blips during the Bush and Obama administrations.  The trend is otherwise nearly linear, as shown by the dotted trend line. 

American Thinker” data-src=”https://images.americanthinker.com/mk/mkcskn4qea6oha6meges_640.jpg”>

In every Democrat administration, receipts as a percentage of GDP grew positively, whereas in every Republican administration, they went negative.  This is not surprising, as Democrat policy consistently wants to take more dollars from the economy (GDP), whereas Republican policy wants to leave it in your pocket to spend as you will.  Obviously, there are many other influencing factors that have driven the economies during each administration, but the patterns over time are clear. 

What is also evident is that GDP growth has no demonstrable correlation to receipts as a percentage of GDP, which, as stated earlier, reflects Democrat versus Republican tax policy.

Image via