Whilst the epic debate on the debt ceiling is waged, I thought it was relevant to take a look at the budget balance historically juxtaposed against personal income tax revenues.Here is a graph comparing Personal Current Taxes as a Fraction of GDP against the Federal Budget Balance as a Fraction of GDP: Surprise! It turns out that they are nearly one and the same. A couple of other observations:
- They are highly cyclical – which should be no surprise: it’s highly tied to marginal economic activity & employment.
- They are highly structural – which also should be no surprise: tax rates have plummeted for years, while the income distribution has skewed strongly in the favour of high-earners (thus the more highly taxed)
It’s every earning group, as well: the bottom quintile of earners have seen their tax burden get slashed in half, while the top 1% have seen a reduction from 37% to 29.5%.This graph comparing Personal Current Taxes as a Fraction of Wages against the Federal Budget Balance as a Fraction of GDP may more demonstrate the falling income tax burdens: Don’t let this fool you into thinking that I’m an advocate of raising taxes. The Federal budget deficit is merely a private sector surplus, and the rapidly delevering private sector needs this injection to maintain private sector equity during the process.