Revenue Reach

Revenue Reach:
House Speaker John Boehner claimed the federal government will take in more revenue this year than any other year in history. That’s true in nominal dollars, but not as a percentage of gross domestic product — a measure preferred by most economists that accounts for growth in population, inflation and earnings.
In fact, as a percentage of GDP, revenues this year are actually lower than the historical average since World War II.
In an interview on CBS Evening News on Feb. 26, Boehner said any solution to the sequester should be resolved with spending cuts, not new taxes.
“The president got his tax hikes in January,” Boehner said. “The federal government will have more revenue this year than any year in our history. It’s time to tackle spending. Period.”
In nominal dollars, the federal government is expected to take in just over $2.7 trillion in revenues this year, according to the Congressional Budget Office (see Table 1-1). That’s higher than any year in history. The previous high was $2.57 trillion in 2007.
But Bob Williams of the nonpartisan Tax Policy Center said it doesn’t make much sense to talk about revenues only in nominal dollars. That doesn’t account for growth in population, inflation or the growth of the economy. Say, for example, the population doubled, Williams said. You would expect the amount of revenues to double as well. So revenues would increase without the need to raise tax rates. But spending would have to go up to provide services to twice as many people. The same is true for growth in inflation and growth in income. That’s why most government numbers crunchers prefer to look at revenues as a percentage of the gross domestic product, which accounts for those factors.
The Congressional Budget Office projects that revenues will amount to 16.9 percent of GDP this year (click on Underlying Data Figures and see Figure 1-2). That’s not a record high. In fact, it’s lower than the post-World War II average of 17.7 percent.

Next year –  when tax increases on upper-income earners, imposed as part of the fiscal cliff deal, fully kick in — revenues are expected to climb to 18 percent of GDP. That’s slightly above the post-World War II average. Looking out over the next 10 years, the CBO projects that revenues will top out at 19.1 percent of GDP in 2015, 2016 and 2023. That’s still below the post-World War II high for a single year of 20.6 percent in 2000 (which Williams notes was a year when the economy was hot and the top income tax rate was 39.6 percent, just as it is today). In fact, every year from 1997 through 2001 had revenues over 19.1 percent of GDP.
– Robert Farley and Brooks Jackson