Biggest Drop in Yearly Tax Receipts Since 1932

August 4, 2009

Recessions are bad business for government. Total tax receipts are down 18 percent this year, the lowest yearly drop since 1932 the AP reports. Individual income tax receipts are down 22 percent and corporate income tax receipts are down 57 percent.

States are getting less revenue too. So far, combined state shortfalls are over $160 billion. Contributing to this number is New York. They face a $2.1 billion budget gap from declining tax revenue. And as E.J. McMahon, director of the Manhattan Institute’s Empire Center for New York State Policy, writes, this is after raising taxes on high-income households by up to 31 percent.

It might now be tempting for states like New York to return to the very tax policies that contributed to their deficit-relying heavily on the volatile income of high-earners. Hawaii and Oregon have recently increased income tax rates on this subset. It is a short-term fix and a long-term mistake.

Back in 1932, when the federal government deficit was $2 billion, Secretary of the Treasury Andrew Mellon testified before the House Ways and Means Committee concerning tax hikes. He warned:

The truth of the matter is that our revenue system rests on a comparatively narrow base, and that our tax receipts are susceptible to the widest variations in accordance with variations in business conditions. This is particularly true of current individual income-tax collections…the weakness in our revenue system is, as I have already stated, the narrowness of the base on which it rests.

He didn’t think the government could rely on the rich to balance the budget then; we shouldn’t think that today.

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