Share this story
Close X
Switch to Desktop Site

Why tax revenues might not reflect economic growth

(Read article summary)
View video

Kevin Lamarque / Reuters / File

(Read caption) US President Barack Obama (L) speaks as Alan Simpson (R), co-chair of the Fiscal Commission, listens during their meeting at the White House in Washington April 14, 2011. Obama said that the United States must use the tax code to help meet its targets for reducing the deficit.

View photo

Caroline Baum argues that economic growth in the U.S. is underestimated by the official GDP numbers.

Her arguments aren't that convincing though. When she for example argues that the defense spending decline reported contradicts other reports, she seems to have missed that the other report was a forecast from March, not an estimate based of available data.

About these ads

Other arguments are somewhat contradictory as she first claims that individual income tax receipts are a good way of measuring labor income and then overlooks corporate income tax receipts (which rose only 4%) when estimating corporate profits.

As it happens, there are at least two reasons why the change tax receipts may differ from economic growth. First of all, tax laws may change. And that was indeed a reason why individual income tax receipts rose sharply as the "Making Work Pay" tax credit expired and it was also the reason why social insurance tax receipts fell as the payroll tax was reduced.

Another reason is that in a system with progressive taxation, an increase in inequality will increase tax revenues relative to GDP because the incomes of the rich which face higher tax rates rise relative to the incomes of everyone else. A decrease in inequality will of course for similar reasons reduce tax revenues relative to GDP.

If you make the reasonable assumption that inequality has increased following QE2, then economic growth is a lot lower than the increase in tax revenues.

Add/view comments on this post.


The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.