As most Americans are aware, the Trump Administration has significantly cut taxes for Corporate America, touting the advantages that this will bring to the U.S. economy. While I don’t wish to get into discussing the advantages/disadvantages of the reduction of the headline federal corporate tax rate from 35 percent to 21 percent, there is an interesting aspect to both personal and corporate taxes that is rarely discussed, that is, the relationship between tax receipts and the size of the overall economy.
Let’s start by looking at this graphic which is sourced from FRED showing how total federal tax revenues measure up against total gross domestic product going all the way back to 1929, just prior to the beginning of the Great Depression:
It is important to keep in mind that total federal tax revenues include personal income taxes, corporate taxes, other payroll taxes (Social Security, Medicare and unemployment insurance), customs and excise taxes and tariffs among others. As you can see, total federal tax revenues have ranged from between 15 and 20 percent of GDP going all the way back to 1943 with some exceptions including the period between the Great Depression and the beginning of World War II when tax levels were far lower than they are today and for a brief period during the dying days of the Great Recession and the two years that followed.
Now, let’s look at total federal corporate tax receipts as a percentage of GDP:
This graph is quite different from the previous graph and shows us that corporate tax revenue as a percentage of the entire U.S. economy has gradually fallen from a high of 7.44 percent in 1951 to its current level of 0.74 percent (Q1 2018), the lowest level on record.
Here is a graph showing federal personal tax receipts as a percentage of GDP:
Again, you can see that this graph more closely resembles the graph showing total federal tax revenues as a percentage of GDP. In fact, at the current level of 7.9 percent, personal tax revenues are slightly above the 71 year average of 7.73 percent and are close to the highest levels seen since 2002.
Just in case you were curious, here is a graphic showing how federal corporate tax rates have varied over the past 100 years:
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