Since World War II, one of the most powerful “third rails” in American politics has been the taxpayer revolt that occurs whenever the federal tax burden nears 19-20% of Gross Domestic Product (GDP).
As the tax burden rises, so does the number of taxpayers who believe their taxes are “too high” The accompanying chart shows a stunningly close relationship between the overall federal tax burden (measured as a percentage of GDP) and the percentage of Americans who feel their tax burden is “too high.” When the tax burden reaches an intolerable level — approximately 19% of GDP — the political pressure to lower taxes rises accordingly. Eventually it reaches a boiling point, forcing lawmakers to respond.
Since World War II, the tax burden has generally meandered between 16% and 18% of GDP. But four times Uncle Sam tried to pocket more than 19% of GDP (the early ‘50s, the late 60’s, 1979-82, and during Bill Clinton’s second term). Each time the percentage of Americans who thought their tax bill was “too high” skyrocketed to between 60% and 70%. And all four times their political frustration reaped dividends. Twice, Congress responded by cutting taxes; the other two times the American people elected presidents who made tax relief a cornerstone of their campaigns.
Lest the difference between 16% and 19% of GDP appear trivial, bear in mind that each percentage point of GDP amounts to approximately $140 billion per year.
Indeed, contrary to liberal allegations that President Bush’s tax relief led to an unprecedented drain on federal revenues, the 2003 tax cuts merely brought the nation’s tax bill back down to earth. In fact, the tax burden in 2006 was 18.4% of GDP, almost exactly the post-war average.
Now, once again liberals on Capitol Hill are poised to test whether that third rail has any juice left in it. Each of the budget blueprints recently adopted by the House and Senate envisions the tax burden rising, not just to the historical tripwire of 19% of GDP, but well above it. From 18.6% of GDP this year, the House and Senate budgets anticipate revenues devouring a steadily greater share of the private economy each and every year — to 19% next year, 20% by 2016, 21% by 2026, 22% by 2033 and so on.
There is no precedent in U.S. history for imposing such a large tax burden on Americans over such a sustained period of time.
At the root of this economically suffocating trend is the scheduled expiration of the 2003 Bush tax relief and the more imminent explosion of the Alternative Minimum Tax. Proponents of this higher tax burden hide behind arcane Washington budget fiction whereby tax windfalls that accrue to Uncle Sam when tax cuts expire are viewed as the exclusive property of Uncle Sam. Simply extending these breaks thus becomes a tax “cut.” As Senate Budget Committee Chairman Kent Conrad (D-N.D.) explained: “You can extend the expiring tax cuts,” but only if “you pay for them” with offsetting tax increases.
As airtight as this logic may appear to liberal lawmakers, it nevertheless caused some heartburn among those charged with defending it. “Our [Republican] colleagues argue that this budget represents the largest tax increase in history,” a defensive Rep. Timothy Bishop (D-N.Y.) acknowledged, but “nothing could be further from the truth” because “this budget … simply extends current law.”
Rep. Bishop is right to feel skittish. According to a new Heritage Foundation analysis, the House budget resolution that supposedly does not increase taxes will nevertheless add $5,376 to the average annual tax bill of Bishop’s Long Island constituents. Nationally, the average taxpayer faces an increased tax bill of more than $3,000.
If the last half century offers any guidance, no amount of budget double-talk will convince taxpayers that all is well if their tax burden is rising. The current level of dissatisfaction with taxes (53%) will inevitably rise until it reaches another political boiling point and ushers in the next tax rebellion.