ABSTRACT
Politics and economics are inextricably linked. Economic conditions affect political choice, and political decision making influences the course of the economy. An economy in recession —a condition in which the real (inflation-adjusted) gross domestic product (GDP) declines for two consecutive quarters—affects both government revenues and spending. Personal income declines and as aggregate personal income falls, so does aggregate consumption, and this lowered demand translates into reduced corporate profits. Personal and corporate income tax revenues decline as a result of their shrinking tax bases. The federal government is hit the hardest, given its heavy reliance on income taxes. Although states also see their income tax revenues fall, they suffer an even bigger loss of sales tax revenues because the sales tax remains their primary revenue source. Local governments that make sizable use of these tax instruments feel similar effects. Those that depend primarily on property taxes are less immediately affected, though a prolonged recession can drive down property values and correspondingly reduce the property tax base.
