Sustainable taxation and the point of equilibrium

Tim Carney of the Washington Examiner rolled out a fascinating chart today, prepared with data from the Tax Policy Center and the White House.  It’s one of the most perfect visualizations I have yet discovered of an idea that has long consumed my attention:

The lower, blue line in this graph represents income tax revenue to the government, from the early days of the income tax through today.  The higher, black line, is total government receipts from all sources  Both are calculated as a percentage of Gross Domestic Product.  As you will notice, these lines are relatively flat, with the total revenue line hovering around 18 percent for most of the past century.

The huge red blur rising and falling far above these lines is the top marginal tax rate.  It rises and plunges wildly over the decades, while actual government revenue hardly moves at all.  As Carney concludes, “No matter how high top individual income tax rates get, Washington has historically never gotten its hands on more than 20 percent of GDP for more than two years in a row.”

It’s interesting that the “sustainability” craze is never applied to government revenue and spending, whose un-sustainable nature is easily and empirically demonstrated with simple charts and spreadsheets.  The goal of responsible government should be crafting a budget that falls well below the black line on Carney’s graph, except in brief moments of existential crisis, because nothing higher can be sustained for long. 

If we want to reduce our towering national debt, we need a budget that spends considerably less than the 18 percent point of equilibrium, combined with a tax system that uses the lowest possible rates to keep revenues at their sustainable level while encouraging robust growth.  These figures are all expressed as percentages of Gross Domestic Product.  18 percent of GDP flourishing under low taxes and light regulation would be far more valuable than 18 percent of Obama quicksand.

In the long run, once the national debt has been relieved, the goal should be finding the lowest, most gentle slope of the Laffer Curve, to finance the smallest and most efficient government, rather than allowing Uncle Sam to clutch 18 percent of GDP and dream about how he’d like to spend it.  Free citizens are not meant to serve as beef cattle for political carnivores.