Friday, May 4, 2012

Why we do graphs

A graph from How fiscally prudent is "lower the rate and broaden the base"? by Craig Gurian at

Pretty sure I've looked at both the series shown on this graph, separately. But putting them together makes an interesting picture. Funny thing, though: To my eye the graph does *not* show what it claims to show. It does not show that "As effective rates go down, so does tax revenue as a share of GDP". Not to my eye.

Oh yeah, the orange line -- the effective corporate tax rate -- shows a consistent downhill run from start to finish.

And yeah, the blue line -- Corporate taxes as a percentage of GDP -- shows a parallel downhill run. But only until 1982. After that, the blue line runs flat.

After 1982 the blue line runs flat while the orange line continues to run downhill. And it is pretty easy to see that the two lines get closer and closer together after 1982.

This is what I think: I think it makes sense to say "As effective rates go down, so does tax revenue as a share of GDP". I think that is what we would expect to be true. But the graph seems to show that it is not true, or anyway that it is no longer true.

It is particularly striking that the change comes just at the start of the Reagan era. Lots of people might not want to admit that Reagan appears to have stopped the decline of corporate tax revenue as a percent of GDP. But then, it is right there on the graph.

It is possible that what the graph really shows is a sudden slowdown in the growth of GDP after 1982, which pushed up the blue line enough to make it run flat.

It is possible that what the graph really shows is that there was a sudden increase in corporate taxables as a share of GDP after 1982, which pushed up corporate taxes enough to make the blue line run flat.

But it is not possible that "As effective rates go down, so does tax revenue as a share of GDP", because after 1982 the effective rate continued to fall and tax revenue did not.


Gene Hayward said...

I get the feeling you won't let this one die an easy death. I look forward (my assumption) to your (and Jazzbumba) further analysis/breakdown. :)

The Arthurian said...

Haha... Hi Gene. I felt bad actually, after I wrote the thing, because the graph distracted me and I never actually read the post that went with it. So I went back and gave it another try.

Pretty good, pretty interesting, far as I got, but honestly too political for me. The same politics, perhaps, that accounts for the incorrect titling of the graph.

But yes, I thought Jazzbumpa might jump on this one, too.

Jazzbumpa said...

I've been busy, and just now caught this post lat on Saturday night. And I will say that my eye does not agree with Art's - though I do see his point.

Maybe I'll give this more thought, but I'm still up to mt eyebrows in other stuff.


Jazzbumpa said...

My disagreement is at a rather nuanced level. I'm not going to say Art is wrong.

Each major orange peak is lower than the previous. Not so with the blue peaks, though only the '07 one is way out of line.

I'll say there is some interesting detail.

Also, there is a denominator effect. GDP growth has been secularly slower since the early 80's, depressing the denominator for the blue line calculation, and thus giving it a boost. That might be the whole story. OTOH, Corp Tax/GDP has bottomed at 2%, and bumped up off that value. There might be a hard lower limit that has bent the curve up.

I'll post something tomorrow.

For now, I think the big difference occurs between 1981 and 2001. Since then, motion has been quasi-parallel, with a fairly constant delta.

The observation that the lower effective rate corresponds with lower tax/GDP is true as a gross generality in the post WW II period.


Jazzbumpa said...

Post is up.