Currently Low Tax Receipts No Excuse to Raise Taxes

Curtis Dubay / February 08, 2011

An AP article today explains that tax revenues this year are projected to be the lowest since 1950. Chalk this one up as a dog-bites-man story.

Our income tax system is highly progressive. Taxpayers pay higher rates as they earn more income. During recessions, incomes contract sharply, so there is less income to tax and the remaining income is taxed at lower rates. As a result, tax revenues dry up by design during recessions.

The recent “Great Recession” caused incomes to plummet at a historic rate. Hence tax revenues dropped to historic lows as a share of the economy as well. To anyone with a familiarity with our tax code, this is entirely unsurprising. It’s hard to have solid income tax collections with 9 percent unemployment.

When economic recovery finally takes hold, tax revenues will rise quicker than they fell. That is why the Congressional Budget Office in its most recent budget estimate showed that tax receipts will recover and even surpass their historical average of 18 percent of GDP by 2018. (more…)