US federal tax revenue is claimed to hover near a fixed share of GDP regardless of statutory rates.
US-specific and disputed; federal receipts have in fact ranged from about 14% to 20% of GDP. The pattern is looser than the claim requires.
In practice
- A government raises the top rate of income tax and finds receipts move by far less than the rate change implies, because the base moves too.
- A finance ministry forecasting revenue from a rate rise alone, with no estimate of the behavioural response, produces a number nobody in the building believes.
- Possible explanations
- The proposed explanation is behavioural: higher statutory rates induce avoidance, deferral and shifts in the form of income, so the effective tax base shrinks as rates rise.
- In its favour
- Federal receipts have moved in a fairly narrow band over long periods, which is the observation behind the claim, and the avoidance mechanism it invokes is real.
- Against it
- American receipts have ranged from roughly 14 to 20 per cent of output, which is a wide band for a supposed constant, the pattern is specific to one country, and revenue also tracks the business cycle rather than rates alone.
- Standing
- US-specific and disputed; the ratio has in fact varied materially.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys