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This op ed appeared in the Duluth News Tribune on January 25th, 2019
One of the great myths of public finance is that politicians can help themselves to more of their citizens’ income simply by raising tax rates. The historical record shows that ain’t necessarily so.
The fiscal history of Minnesota provides a good example. Since 1974, the top rate of state income tax has been as high as 17 percent in the 1970s and early 1980s and as low as 7.85 percent in the 2000s. Over those periods, state income tax revenues were a very stable share of state GDP; the mean average was 2.8 percent and the median was 2.7 percent. The same was true of revenue more broadly. Both the mean average and the median of state tax revenues as a share of Minnesota’s GDP came in at 6.6 percent.
National developments make it more important than ever to see through this myth. Freshman U.S. Rep. Alexandria Ocasio-Cortez, D-N.Y., has called for a “Green New Deal” amounting to nothing less than “a wartime-level, just economic mobilization plan to get to 100 percent renewable energy ASAP.” Sounds expensive. Fortunately, it will be “the rich” who will pay for this with a proposed increased top marginal income tax bracket of 70 percent.
Again, this assumes that higher tax rates will be followed by proportionately higher tax revenues. And, just as this hasn’t been the case in Minnesota, it hasn’t been the case in the U.S. generally, either.
According to the Tax Policy Center, since 1946, the top rate of federal income tax has ranged from 92 percent in the early 1950s to 28 percent in the late 1980s. And yet, over the same periods, federal income tax receipts were a pretty stable share of U.S. GDP; the mean average was 16.8 percent and the median 16.9 percent. Indeed, in the two years when the top tax rate topped 92 percent (1952 and 1953), tax revenues as a share of GDP were, on average, 17.9 percent of U.S. GDP. In the three years when the top tax rate was 28 percent (1988-1990), that figure was 17.4 percent.
There is, in short, very little relationship between changes in tax rates and changes in tax revenues as a share of the nation’s income. Whatever the top rate of federal income tax, the citizens of America seem to have decided in some mysterious, collective, yet uncoordinated way that 16.8 percent of their income is all the federal government is going to get.
This shouldn’t be surprising. Taxes are incentives. That is one reason why politicians levy them in the first place. When tax rates change, so do people’s incentives. And when their taxable behavior changes so, in result, does the tax revenue received.
If Rep. Ocasio-Cortez is serious about her “Green New Deal,” she is going to have to get serious about paying for it. She will have to find the money somewhere in that fixed, 16.8 percent allowance that the American public gives to its politicians. This will mean cuts — heavy cuts — in other areas of federal spending. Until she can tell us what these cuts will be, Rep. Ocasio-Cortez’s dreams will remain just that.
John Phelan is an economist for the Center of the American Experiment (AmericanExperiment.org), which is based in Golden Valley, Minn.