Sunday, January 20, 2008

Cyclically-Adjusted Tax Revenues Under Different U.S. Presidents

Paul Krugman is attempting to provide "straight talk on taxes" at his blog. He shows real federal revenue per capita from the early 1990s to the present. While his approach is insightful, I like to look at the cyclically-adjusted federal revenues as a percent of GDP. This approach makes similar adjustments as does Paul's measure--it accounts for the size of the economy and inflation--but it also adjusts for the influence the business cycle has on federal revenues. This latter adjustment is important because both the Reagan and Bush tax cuts were during economic downturns. (The data is also easily available from the Congressional Budget Office at this site; look for the "standardized budget revenue".)

I downloaded down the data and created the following graph (click here for larger picutre), where the dashed lines mark off each presidency:

This graph is not what I expected. I will let it speak for itself. Mabye Paul Krugman will have a word to say on it.

To be clear, and repeating what I stated when I discussed cyclically-adjusted budget balances, I still find the nuanced Laffer curve view--if I can call it that--of Justin Fox, Brad DeLong, and Greg Mankiw a reasonable position to hold.

My above post did not make clear why it is important to correct for cyclical influences on tax revenues. Both the Reagan and Bush II tax cuts occurred during economic downturns. This timing means that even if there had been no tax cuts tax revenues probably still would have declined during the recessions. Similarly, even if Clinton had not increased taxes there probably still would been higher tax revenues given the booming economy of the mid-to-late 1990s. Consequently, one needs to also account for these business cycle influences when assessing the tax revenue evidence. The data I use above makes this adjustment.

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