Measuring the Optimal Tax Burden

George W. Bush, in his final Economic Report of the President (January 2009), estimates a federal tax burden of 17.9 percent of GDP for both fiscal year 2008 and 2009. Based on the econometric models used in this paper, a 17.9% tax burden (federal tax receipts as a percent of GDP) translates into a growth rate in real GDP of 2.8% annually. Thus, the current 2009 economic downturn is being caused by a financial shock to the American economy, not by any increase in tax burden. In fact, George Bush leaves office with a lower tax burden than in the fiscal year 2000, when the federal tax burden was 20.9% of GDP. But what if President Obama decides to raise taxes during his term in office? What do the models in this paper have to say about such a plan?

Using this updated information, if President Obama raises tax burdens, trend growth in real GDP
will fall further in the U.S. economy – to no more than 2.5% annually. This is less than the 3.2% trend
rate in GDP growth over the second half of the 21st century. To return to such a growth rate, President
Obama would have to actually LOWER current Bush tax burdens to 17.4% of GDP. This is unlikely to happen given Obama’s 2010-2014 spending plans of 22-27% of GDP and the ensuing federal deficits.