TPC Takes the Tax Challenge with Income Tax Rates
We recently invited folks to take the spending challenge and show how they would close the budget gap without raising taxes (or alternatively, take the tax challenge and show the inverse). Our first contestant suggested cutting bureaucracy -- a good idea but one that doesn't get us too far.
Bob Williams, Rosanne Altshuler, Katie Lim of the Tax Policy Center took this challenge without even knowing it recently, in a paper measuring what we would need to do on personal income tax rates in order to stabilize the debt.
So can we fix our budget problems with income tax increases? The short answer is no.
This is especially true if we only tax the rich. The authors looked at how high the top two rates would need to be to bring the deficit down to 2 or 3 percent of GDP if we kept other rates at their current levels -- as per the pledge that taxes not be raised for those making under $250,000 a year. In that case the top tax rate would need to increase to as high as 90 percent.
Chart Created With Data From The Altshuler, Lim, and Williams, "Desperately Seeking Revenue."
And in reality, such high rates would almost certainly influence behavior and negatively imapct the economy; as a result, they would raise much less revenue than the authors' static analysis reflects.
So what about moving passed the $250,000 tax pledge? Well, if we raised each rate proportionally they would each have to go up by 40 to 50 percent -- so the bottom rate would have to increase from 10% to as much as 15%, and the top rate from 35% to around 50%. And again, these assume no behavior responses.
Chart Created With Data From The Altshuler, Lim, and Williams, "Desperately Seeking Revenue."
And still, these taxes only get you to 2019. As the population ages and health care costs grow, the costs of Social Security, Medicare, and Medicaid are expected to rise considerably in the following decades. So tax rates would have to keep rising.
Income tax rates can surely be part of the solution, but they fall short of being able to fix the budget problem on their own. An excelent place to look for new revenue would be the income tax base, which could be broadened by reducing the multitude of tax credits, deductions, exemptions, and exclusions.
Even then, depending on how much policy makers are willing to cut on the spending side, there may very well have to be a new source of revenue: likely contenders are an energy tax, transactions tax, or consumption tax.
If these taxes are considered, one of the most heated debates is likely to be over whether they should be introduced in place of the income tax, on top of it, or some combination. We'll surely write more on this in the future.
(If we decide it makes sense to raise income tax rates, here is a rough guide of home much we could raise per percentage point increase.)
| Options |
Revenue (billions) | |
| 5-year | 10-year | |
| Raise All Ordinary Rates by 1% | $196 | $455 |
| (Include AMT and Capital Gains Rates) | $267 | $626 |
| Raise Top 4 Ordinary Rates by 1% | $81 | $200 |
| Raise Top 3 Ordinary Rates by 1% | $47 | $119 |
| Raise Top 2 Ordinary Rates by 1% | $39 | $99 |
| Raise Top Ordinary Rate by 1% | $29 | $74 |
| Raise Rate by 1% for Income Above $1 million | $17 | $45 |
Chart Created With Data From The Congressional Budget Office
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Big Bureaucracy
The paper you are citing assumes that in practice the Congress does not like to cut spending and the current tax code model will stay in place. How about Congress changes that.
I remember my parents lost big chunk from their social security benefits when after the fall of communism their big government country went bankrupt. Caps on social benefits were imposed and those are still in place 20 years after.
SS, Medicare and Medicaid are unsustainable government monstrosities of waste and inefficiency. President and Congress better start with saving those Medicare almost 500 billions from fraud and waste that they planed in the health care bill. Than somebody in this Congress should break the news to the seniors and impose caps on their benefits.
It will kick the politicians out of office, but it is time for the repo man to come in and the government that is addicted to spending to be reported to the Credit Score Sharks.
When somebody goes bankrupt they stop payments and reform their way of life so hopefully in the future bankruptcy does not happen again.
Raising taxes is like giving booze to an alcoholic.
US tax code should be repealed and fair tax should be imposed.
If the US Bureaucrats cannot sustain the budget with this tax-rates there is little hope they will do better with 1 % increase.
Best Wishes! http://www.bigbureaucracy.com/
Big Bureaucracy
Also I don't see in the paper any model that shows how the deficits will be affected if the Reagan Earned Income Tax Credit is eliminated.
This will make a lot of folks in the lower tax brackets to participate in the tax process and share the burden equally will the middle class that is seeing their itemized tax-deductions under assault.
All models presented the paper will make out tax-code more progressive, not more fair.
Big Bureaucracy
Also the last 3 words in the paper are:
value-added tax
That tax is an open invitation for the organized crime to dip into the tax revenues pie as the shining example of Europe shows. Look at the latest cap-and trade scandal in EU - billions of Euro stolen through their value-added tax. It is a tax that generates a lot of paperwork and bureaucracy and is easy for the organized crimes to run schemes in that environment. VAT - bad idea for America
wow!
Just had to say, great job ignoring corporate income taxes (which have steadily declined over the past two decades) and ignoring capital gains, too! You've proved the point that corporations and investors need to pay their fair share - not just working people. Thanks.
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