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Thursday, July 14, 2005

Another Strange Encounter With Krugman's Claims

Bob Doyle wrote a brilliant letter to Donald Luskin of The Conspiracy To Keep You Poor And Stupid.

In reaction to Paul Krugman's suggestion that the government should just take in 28% of GDP as revenue (for what?) to avoid deficits, Doyle looked at the historical data. Providing 2 charts from the Bureau of Economic Analysis, he found that:

total Federal revenues as a percent of GDP have grown very slightly since WWII, but have averaged 17.9% and have largely fluctuated between about 17.5% to just under 20% of GDP. Only ONCE, when they reached 20.6% in 2000, have Federal revenues exceeded 20% of GDP.

Doyle also reports:

Despite quite radical changes in tax rates and other features of the tax code (we have had three entirely different tax codes since 1946 -- the 1936 tax code, the 1954 tax code, and the 1986 tax code), Figure 2 shows that total tax revenues and individual income tax revenues to the government have been almost constant as a percentage of GDP. In other words, there is no relation between tax rates and the amount the government collects in tax revenue as a percentage of GDP!

The NYT star economist apparently cannot get what he wants in this world called Earth.

Stay with the idea of revenue as a percentage of GDP (our countries economic growth). In essence, when the tax rates are high, the GDP does not grow very much and the government's revenue from all of its taxes as a percentage of GDP is the same as when tax rates are low. When tax rates are low, the GDP grows and that low tax rate on higher GDP produces greater revenue. Therefore, since you are stuck basically with 20% of GDP as revenue, if you want the government to increase its revenues, cut taxes. That is the option I choose. How about you?

Oh, and answer to reducing the deficit besides cutting taxes? ...Cut spending. That lesson comes without charts and confusing numbers.

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