by Gary Alexander

February 22, 2023

In 2022, U.S. GDP rose 2%, the S&P 500 fell 19%, but federal tax revenues soared 21%. Please explain.

Yes, inflation is part of it, but wages only grew by about 5.4% last year and inflation by 6.5%, not 21%. History and human nature tell us that people work more and declare more income when it is taxed less.

Last Wednesday, February 15, the Congressional Budget Office (CBO) issued its annual budget, forecast, and review at the mid-point of Mr. Biden’s first term and – dare I mention it – five years into the Trump Tax Cuts of late 2017. Since President Biden has not repealed or changed the 2017 Trump tax cuts, we now have what amounts to (1) two years of prosperity under Trump’s tax cuts, (2) one year of COVID shutdowns in 2020, and (3) two years of huge revenue gains under Biden, despite lower tax rates.

First, take a look at the latest data from the CBO – to establish what I just summarized:

Year Revenues (billions) Change
2017 $3,316.2 +1.5%
2018 $3,329.9 +0.4%
2019 $3,463.4 +4.0%
2020 $3,421.2  -1.2% (Covid year)
2021 $4.047.1 +18.3%
2022 $4.896.0 +21.0%
Source: Congressional Budget Office

In addition to the huge revenue gains in 2021 and 2022, there was a great closing of the income and jobs gap in 2018 and 2019, plus a boost in GDP growth, before COVID interrupted that momentum in 2020.

  • The U.S. poverty rate fell to its lowest level ever (10.5%) by the end of 2019.
  • Black unemployment fell to 5.2%, the lowest rate ever, Hispanic employment fell to 4%, the lowest rate ever, and the rate for workers without a high school diploma was 5%, its lowest rate ever.
  • Real median income rose to $68,703 in 2019, rising more in 2019 than all eight years under Obama.
  • Growth exploded: From the fourth quarter of 2017 to the third quarter of 2018, U.S. GDP growth went from trailing the Eurozone to exceeding Europe by 2.5%. or $500 billion.
  • (Source: “Taxes Have Consequences,” by Dr. Arther Laffer, et al)

United States Median Household Income Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

According to the CBO, tax revenues reached a lofty 19.6% of GDP in 2022, well above the 1973-2022 average of 17.4%. That’s “a share of the economy only reached in 1944, 1945 and 2000,” said The Wall Street Journal in “The Biden Government Blowout” (February 16, 2023). Revenues of nearly 20% of GDP would almost balance the budget if the federal government could cut spending to match the 1973-2022 norm of 21% of GDP, but the Biden budget last year was bloated to nearly 25% of GDP.

Revenue is not the problem; spending is the problem, yet we hear Democrats saying that Republicans in Congress want to “add $3 trillion to the deficit” by maintaining the current rates instead of raising them.

This is an Old Story, Often Repeated

Over this long President’s Day weekend, it pays to ruminate over the welcome fact that economic laws don’t depend on one’s Party affiliation, or who occupies the White House. This story has been repeated often in the last century. Tax rate cuts have been enacted by six recent Presidents, three from each party!)

In his book, “Taxes Have Consequences: An Income Tax History of the United States” (2022), Dr. Art Laffer and two PhD economist colleagues (Jeanne Carnes Sinquefield and Brian Domatrovic) focus on the 110 years since the birth of the income tax in 1913. Although there were tax rate cuts in the 1920s that generated great prosperity, some will say that precipitated the 1929 crash, but there is no connection. The depression came from the Fed choking off money supply by a third, 1929-32, so I’ll focus on later times.

1960s: Kennedy-Johnson: From 1952 to 1963, the top income tax rate was over 90%, resulting in slow growth under President Eisenhower, including three recessions, but Democratic President John Kennedy proposed a cut in top tax rates from 91% to 70% plus a cut in corporate taxes and trade tariffs. He was killed before his ideas were passed, but Lyndon Johnson passed the “Kennedy-Johnson tax cuts” and the nation prospered for the rest of the 1960s, with the longest, strongest postwar recovery to that date.

Kennedy Johnson Tax Cuts Image and Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

1980s: Ronald Reagan: At the end of the stagflationary Seventies, the highest marginal personal income tax rate had been 63% or higher since 1932. Reagan brought the top rate down from 70% to 28% by 1988. He cut the capital gains tax rate in half, from 40% to 20% right away. The corporate tax rate declined from 46% to 34%. This unleashed the greatest postwar boom America had seen, and a mega-stock market rally from 1982 on, plus 20 million new jobs, sharply declining inflation, and the end of the Cold War.

Despite sharply lower top rates, the richest 1% began paying an even higher percentage of the tax bill:

Marginal Income Tax Rate versus Share of Taxes Paid Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

1997-2003: President Bill Clinton cut capital gains taxes from 28% to 20% at the start of his second term, spurring great growth in wealth and taxes paid by the richest 1%, and in 2003 George W. Bush cut the top tax income rate from 39.6% to 35%, with a resulting increase in tax revenues from all sources.

Note in this chart the bump in tax revenues from 2003 to 2007 in individual income tax revenue (blue line, top), payroll taxes, and corporate income taxes (black line), despite the decline in tax rates after 2003:

Federal Tax Revenues Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

2017: The Trump tax cut had the same effect, before it was interrupted by COVID for a time before taking a more powerful effect in 2021. Lower tax rates have consistently resulted in higher revenues, especially from the rich. If we want revenue and growth, it would seem we could learn from history.

There is always the populist plea to “soak the rich” at rates of 70% or more. It makes sense, on paper, but it makes no sense on Planet Earth, where real people live, since the rich are not dumb. They have access to lawyers and accountants who can use the thousands of pages of tax code to avoid paying higher taxes.

The tax code is the least of our problems right now. Let’s go to work on stopping unnecessary spending.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Global Vise Tightens on Russia

Income Mail by Bryan Perry
Mounting Confusion About What Lies Ahead

Growth Mail by Gary Alexander
Explain This! Flat GDP + Market Crash = Soaring Tax Revenues!

Global Mail by Ivan Martchev
The Bond Market Now Looks to the Fed

Sector Spotlight by Jason Bodner
What Does an “Overbought” Market Mean?

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Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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