US Taxes

At the 1988 Republican National Convention, presidential candidate George H. W. Bush  famously said "Read my lips: no new taxes." In fact, taxes went down in the first part of the Bush I Administration (see the graphic above, click to enlarge), but started going up again and reached the lower 98% prediction interval right before the Clinton administration. And, taxes continued to go up until hitting the upper 98% prediction interval right before the Bush II Administration. In fact, taxes appear to go up during Democratic administrations and go down during Republican administrations, while bouncing around a cyclical attractor path (dashed red line above). What's going on here and what might we predict for the new Right-Wing Republican Administration scheduled to take office in early 2025?

First, I can easily predict that tax revenue is going to be lowered. I can also predict that tax revenue will return to the attractor path and increase sometime during or after the Trump administration. History clearly makes the prediction. But what is driving the cyclical attractor path and the prediction of future increases in tax revenue after 2030?

Aggregate tax revenue is being driven by growth in the US SocioEconomic system. When the economy does well, the government increases its revenue. This should be no surprise. But that's not all that is going on because actual tax revenue itself cycles around the attractor path.

What is driving the actual taxation cycle (and this should also be no surprise) are political shocks (see the graphic above, click to enlarge). Republican administrations, starting with Bush II and continuing with Trump I, pass massive tax cuts that eventually have to be rolled back (even during the same administration e.g., the expensive War on Terror starting after Sep 11, 2001 during the Bush II administration).

The assumption is that these cyclical tax cuts help the wealthy and fuel the deficit. I will look at the effects of tax cuts in a future post, but for the present I want to emphasize that tax cuts are both a political football and a countercyclical approach to balancing the economy. Tax cuts could probably be a more effective automatic stabilizer if politics was more rational.