One of the most helpful lessons I learned in my research was understanding the historical relationship between GDP (Gross Domestic Product) and federal revenues as a percent-age of GDP. For example, in 2008, federal revenues were $2.5 trillion and GDP was $14.2 trillion; therefore, revenue was 17.61 percent of GDP ($2.5 trillion ÷ $14.2 trillion = 17.61 percent).
Over the past forty years, the amount of federal revenue as a percentage of GDP falls within a narrow band between 14.9 percent and 20.6 percent. The forty-year average is 17.79 percent.
Note the forty-year average of 17.79 percent is during years of high and low individual and corporate tax rates.
U.S. REVENUE AS PERCENT OF GDP: 1970-2009
- 15% – 1 time
- 16% – 7 times
- 17% – 16 times
- 18% – 9 times
- 19% – 6 times
- 20% – 1 time
If GDP grows to $20 trillion in 2019, we can project with great confidence that maximum revenues will be some-where between $3 trillion ($20 trillion x 15 percent) and $4 trillion ($20 trillion x 20 percent).
You can squeeze only so much federal revenue out of the economy.
It is also indisputable that there are limits to how much revenue can be generated based on growth in GDP. No matter how much GDP expands, we can expect federal revenue to amount to only 17.79 percent (based on the forty-year average). These facts are important to keep in mind because I have seen some government reports that project federal revenues in excess of 20 percent of GDP. These overly optimistic (and therefore unrealistic) projections immediately caught my attention because they greatly exceed the forty-year historical average.
Your Prep Plan: How to best use revenue as a percent of GDP in conversations.
- Store in your memory: 40 years – 17.79 percent average
- Store in your memory: Revenue as percent of GDP (R/GDP) always falls in a narrow range of 15-20%
- In the past 40 years (1974-2004) our tax rates have been high and low
- During those years (R/GDP) has always been between 15-20%
- Therefore no matter what the tax rate is (high or low) you can expect (but of course not guarantee) revenues to average 17.79% of GDP