India’s budget deficit and taxes are smaller portion of GDP than in US

Debate rages over taxes in the US, with Republicans, who control Congress, working to cut them. Democrats hope to raise them, for the wealthy at least.

The Republican stance is that lower taxes will boost economic growth, while Democrats say higher taxes on the wealthy are necessary to cut the budget deficit and redistribute wealth toward the needy. The budget deficit totals 6.3% of GDP.

You might be surprised to learn that to some extent it really doesn’t matter what the tax rate is. Since the end of World War II, total tax revenue has averaged about 20% of GDP each year. That has come while the top federal income tax rate ranged from 28% to 91%.

This means our tax payments equate to a fifth of economic output, regardless of what we’re paying in taxes. That may be counterintuitive, but think about it this way: when income tax rates are low, people have more money to invest. That in turn means more capital gains, and more capital gains taxes. Looking at the flip side, when income tax rates are high, people obviously pay more taxes.

Theoretically, then, taxes should have a neutral impact on economic growth, as they always total about the same amount of GDP—20%. GDP growth itself registered 2.8% last year.

Numbers are a bit different in India

For a comparison, it might be instructive to look at the numbers for India, the fastest growing of the world’s major economies. It trails only the US, China, Germany and Japan in total GDP—$3.6 trillion, compared to $27.7 trillion for the US. 

The Indian economy expanded 6.5% in fiscal 2025, which ended in March. Meanwhile the country’s budget deficit totaled 4.8% of GDP, and tax revenue hit 11.6% of GDP.

It would be tempting to say that a smaller budget deficit and low taxes help India outstrip the US in economic growth. But it’s difficult to make a clear comparison, as India is in such an earlier stage of growth than the US. That’s evidenced by the US’ huge lead in per capita GDP—$81,000 to $2,500 for India.

All these statistics are interesting from an academic perspective, but they don’t lend to definitive conclusions.