Taxes: Bad News, Good News

Federal tax receipts are approaching 17.5% of GDP. Whenever the percentage gets this high, a recession follows. That’s the bad news.

What’s the good news? The percentage rarely gets above this, and when it does, there is a recession. Receipts fall. This means that the federal government cannot get above 20%. It can borrow to get spending above 20%, and it is doing this. But federal tax receipts have a ceiling in the United States. We are close to that ceiling. This is a major restraining factor on the federal government.

McLellan has provided two informative charts. I regard these charts as important for illustrating why the USA is not going to turn into a European welfare state.

The first chart is of recent developments. Look at what happens every time tax receipts get close to 20%.

Tax-Recession

The second chart traces this back to 1944, at the peak of World War II, when federal spending rose to the highest in the nation’s history.

Tax-Recession1944

Here is McLellan’s assessment.

The current number is 17.5%, based on total federal receipts for the 12 months from April 2014 through March 2015, and based on projected GDP for Q1 of 2015. That is very close to the 17.7% reading we saw in 2007, just before the financial market collapse.

Americans grouse about taxes, but in fact the United States is a tax haven when compared to most of Europe, Monaco excepted. There is a ceiling on federal tax receipts here: under 20%. Congress would push way beyond this ceiling if it could, but it can’t.

This debt will build up until the Great Default. The Great Default will break the American welfare state. Until then, we must sit tight. Be of good cheer: the ceiling is real, and we are approaching it.

Batten down the hatches. The Bernanke-Yellen boom is on its last legs.

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