A Question for Readers – Why are Taxes as a Percentage of GDP Low?


Today I have a question for readers of this blog.  I was reading in an editorial in the local paper.  The writer, who was saying that the issue causing the US deficit wasn’t over-bloated entitlement program, but was that we weren’t funding them.  She pointed out that the US has the lowest ratio of tax collections to GDP in decades; therefore, we should just raise taxes and everything would balance and we could spend away.

I couldn’t believe that this was right, so I went online and checked.  Sure enough, tax collections are in the 15% range, where traditionally they have been in the 18-20% range:

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=205

Collections seemed to drop after the housing bubble burst and the recession started.  Taxes have not changed during that period, except for the payroll tax on the worker’s side dropping by a couple of percentage points.  You can see this in the 2011 collections, and perhaps part of 2010.

From the table, it looks like both corporate and individual taxes declined and have stayed down.

My question is this:  What is causing tax revenues to decline more than GDP?

Does this mean that companies have been providing the same amount of stuff, but not been making as big a profit as they did in the past?  Perhaps they are reinvesting a lot more and distributing a lot less?  On the individual side, I’m guessing it is just because people have lost jobs or taken pay cuts.  Maybe they are also putting more away for retirement and using other tax sheltered accounts.

Maybe people are sheltering taxes better since those making money and creating jobs probably don’t agree with the philosophy of the current administration.  Maybe the GDP numbers are wrong.

Any thoughts?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

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