Political  Calculations

What's the biggest single factor that determines how much money the U.S. federal government will collect in any given year?

For our money, it's Median Household Income. The chart below, which shows the relationship between median household income and the total receipts of the U.S. government for each year since 1967, the earliest year for which we have median household income data, shows why we think that.

Here, we found that a simple power law relationship exists between the amount of median household income in the United States and the total amount of money that the federal government collects each year, which is why we've opted to show both the horizontal and vertical axes on a logarithmic scale: a power law relationship becomes a straight line when graphed on such a chart.

Total U.S. Government Tax Collections vs U.S. Median Household Income, 1967-2010 

All in all, given the variation we observe from year to year, the formula we presented on the chart will be accurate to within 12% of the actual amount of money collected by the U.S. government in any given year if you only know the median household income, and often much less than that amount. That's pretty remarkable considering how much, and how often, U.S. income tax rates have changed since 1967.

This suggests that no matter waht you do to tax rates, the biggest thing you can do to boost tax revenue is boost household income.

But then, you don't have to take our word for it. You can use the tool on this page to do the relevant math for yourself.  

And now, you would just need to compare your results with the OMB's historical tables for "Total Receipts".

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.