I found some pretty interesting pages on the internet about taxes and spending.
This chart shows the top marginal tax rates from 1916-2010.
And this web page has charts showing government receipts and spending as a percentage of GDP.
Now it has been pointed out that the income tax rate was 91% during the years 1951-1964, yet this was a period of excellent economic growth. This statement is deceptive, however, because during the same period the corporate tax and capital gains tax rates were lower than that. Still this period has higher tax rates we do today.
Rates don’t tell you the whole story, because how income gets calculated determines what this rate is applied to. During the 1951-1964 period, there were a whole bunch of ways to reduce your income and to get what was left reclassified as capital gains instead of ordinary income. You might call these loopholes. The chart of tax revenues collected shows that revenues were between 15% and 20% of GDP during that time period. People were most certainly not paying 90% of their true economic income in taxes.
On the other hand, these charts do show that tax revenue collected as percent of GDP peaked in the 1990s at around 20%, and that was a time of good economic growth. The Bush tax cuts led to less revenue but didn’t do too much for the economy. Now, I do think that part of this is explained by luck: Clinton was president during a good part of the business cycle, and Bush the tax cutter was president during a bad part of the business cycle, and that tax rates didn’t have much impact either way.
During the last three years, we see that government spending has skyrocketed while tax revenues have plummeted. But this huge budget deficit hasn’t stimulated us out of a bad unemployment situation. It is my belief that our employment problems are structural (immigration, automation, and outsourcing of jobs to low-wage countries) and we are not going to make things better by continuing to run with such a massive budget deficit.
Because government aims to do a lot more today than it did in the 1950s, it seems appropriate that the country needs to shoot for government revenue being 20% of GDP rather than 15%. In other words, a budget compromise needs to include tax increases as well as spending cuts. And I would strongly recommend that tax increase come from closing loopholes rather than by increasing marginal rates on ordinary income.