Should We Raise Taxes on the Middle Class? We Already Are
By Andrew G. Biggs Friday, June 25, 2010
Taxes are already rising to record levels, with or without legislative changes.
...And yet, Hoyer’s call for what the TaxVox blog calls “a ‘serious discussion’ about whether to permanently extend the Bush tax cuts for those making less than $250,000 as President Obama wants” deserves greater attention.
Here’s why: taxes are already rising to record levels, with or without legislative changes. It’s not clear why they should rise further, as Hoyer urges.
As I argued in the Wall Street Journal in 2008, the income tax code is inadequately indexed for the growth of incomes. The income tax brackets—the dollar amounts that designate the tax rates that apply to an individual’s income—are indexed only for inflation, while incomes tend to rise about 1 percent faster than inflation each year. The result is that a greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.
The effects of this are larger than you’d think. According to Congressional Budget Office (CBO) data, individual income tax receipts averaged 8.15 percent of Gross Domestic Product from 1953 through 2008. Due to the recession, this year they’re projected to equal around 8 percent of GDP.
But by 2020, income tax receipts are projected to rise to 9.5 percent of GDP, even if all of President Bush’s tax cuts are made permanent. By 2030, income tax receipts will rise to 10 percent of GDP, 22 percent higher than the historical level.
Put another way, the CBO reports that in 2007 the average household paid 9.3 percent of its income in taxes. Obviously, this average masks a tremendous variation between income levels, and households pay payroll and other taxes as well. Nevertheless, we can roughly estimate that the average household income tax rate will rise to 10.4 percent by 2020 and 10.9 percent by 2030. Average marginal rates—the rate paid on an additional dollar of earnings—will also rise.
In other words, we don’t have to talk about tax increases, we’ve already legislated them. If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress. But such a proposal would be helpful, since it would focus the public’s mind on the size and responsibility of government relative to individuals.
Yet, over time taxes will rise through simple inertia. And if the Bush tax cuts for high earners are allowed to expire, then tax revenues will rise further...
american.com |
