Tax Realism

The numbers shown in this graph (from [1]) are appealing to my skeptical mind. While democrats believe that taxes (particularly on the rich) can always be increased to get more revenue and republicans try to argue that increasing taxes (particularly on the rich) actually reduces revenue, the reality is that... tax rates don't have much effect at all:



Over the 60 years shown in the graph, tax rates fluctuated enormously (between ~90% and ~25%). Yet tax revenue to the government as a percentage of GDP stayed almost always at 15-20%.

One idea I like, at least to focus the debate properly, would be to mandate that tax revenues are to be fixed at, say, 18% of GDP. Some advantages of doing so would be the following.

1. It reminds everyone that we don't have a limitless supply of money. There is a fixed percentage of GDP that can be spent on services, and so the only question is how we will divvy that up.

2. On the other hand, we can increase the amount of tax revenue in absolute terms by increasing GDP. Hence, this gives even big-government types an incentive to be pro-growth.

3. One other approach to increasing tax revenue is to switch to more efficient taxes. Hence, this gives big-government types a reason to like some of the tax proposals typically supported by pro-growth types. It's worth pointing out that European countries tend to have more efficient tax schemes than the US already, while they also tend to have more government services, so this scenario is not as outlandish as it may sound.

[1] http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-fraction-of-gdp/