Falling Tax Revenues Shows That The U.S. Economy Remains Weak

Preliminary numbers for October shows that federal tax revenues fell by 18%, following a decline of 7% between October 2007 and October 2008.

Part of the decline this year reflected the revenue reducing provisions in the stimulus package, but the main cause is the weak economy. Illustrating this is the fact that state tax revenues are down by nearly 10%. And states haven't reduced taxes, in some states like California and New York they have in fact been raised.

The perhaps most interesting point here is that this confirms my belief that GDP statistics provide a far too rosy picture of the state of the U.S. economy. If those numbers had been true, then we would have seen a much smaller drop in federal and state tax revenue.

However, it is not likely that overall economic activity fell as much as 10%. Since income taxes are to varying degree progressive, it could and probably did also partly reflect a reduction in economic inequality.

Local government tax revenues have held up better, but this reflects the fact that local governments rely largely on property taxes, the amount of which do not fluctuate according to the level of economic activity.