Here Dip Poop is the article. It was published else where. Read it with care.
taxfoundation.org
March 10, 2004
Don't Repeal Tax Cuts for the "Rich," Cut the Spending Stupid
By Scott A. Hodge and J. Scott Moody
As members of Congress debate the budget resolution for the FY 2005 federal budget, many lawmakers are convinced that the 2001 and 2003 Bush tax cuts – especially for high-income taxpayers – are the principal cause of today’s high tide of red ink.
Indeed, some believe that repealing all of the tax cuts for upper-income Americans – Senator John Kerry, for example, would start the repeal at $200,000 – would make a significant dent in the deficit.
As the table below shows, repealing those tax cuts on upper-income Americans cuts the deficit by only 10 percent, and repealing all of the Bush tax cuts would cut the deficit by only one-third.
Action "New" Taxes Raised
($ billions) Deficit Remaining to be Cut
($ billions)
CBO Estimate for FY 2004 $ 477
Step 1:
Return top two tax rates to 36% and 39.6% -- and apply those rates to dividend income $ 27 $ 450
Step 2:
Restore the higher tax rates on dividend and capital gains income for remaining tax brackets $ 20 $ 430
Step 3:
Restore all other tax rates to 2000 levels and repeal the 10% bracket $ 70 $ 360
Step 4:
Restore Marriage Penalty and eliminate the EITC and AMT adjustments $ 26 $ 334
Step 5:
Return the value of the child credit to $500 from $1,000 $ 21 $ 313
Total "New" Revenue Raised $ 164
Tax Foundation economists employed an individual tax model similar to the one used by Congress’s Joint Committee on Taxation to estimate the revenue effects of changes in tax law. It is "static," by which we mean that the model ignores the changes people make in their earning, saving and spending habits when their tax rates change. And because it is static, it likely overstates the amount of new revenue a tax hike will generate.
The Congressional Budget Office currently estimates that the government will collect $762 billion in individual income taxes this fiscal year. As the nearby table shows, we carefully "repealed" major parts of the Bush tax cuts to see how much more revenue would be collected in 2004 had each not been enacted. We then show how each change would lower the $477 billion estimated deficit for this year.
Our first step was to return the top two income tax rates to their original levels (the 35 percent rate back up to 39.6 percent, and the 33 percent rate back to 36 percent) and repeal the preferential 15 percent tax rate on dividend income for these taxpayers. In our static world, in which the "rich" do not respond to higher tax rates, this repeal would raise $27 billion – most of which would come from the roughly 700,000 taxpayers earning more than $500,000 per year. Unfortunately, this would only lower our current year deficit to $450 billion, a very long way from balance.
We next repealed the new 15 percent rate on dividend income for taxpayers in all other tax brackets and reset the capital gains tax rate to 20 percent. Restoring these rates to their 2000 levels would raise $20 billion, cutting the deficit to $430 billion.
Too few in Washington recognize that a sizeable majority of the 2001 and 2003 tax cuts benefited millions of working families across the country by lowering their income tax rates, lifting the so-called marriage penalty, and raising the value of the child credit to $1,000 from $500.
We found that restoring all of the old individual tax rates, as well as eliminating the new 10 percent bracket, would raise $70 billion and, thus, lower the deficit to $360 billion. Repealing even more "middle-class" tax cuts, such as the marriage penalty and the adjustment to the Alternative Minimum Tax, would raise an additional $26 billion and cut the deficit to $334 billion, still miles away from balance.
Lastly, we returned the value of the child tax credit to its old level of $500 per child. It is important to note that few tax measures in history have had such a profound impact on the tax burden of working families as the child credit. By our estimates, the increased value of the child credit knocked at least 3.6 million families from the tax rolls. Currently, more than 44 million taxpayers (one-third of all filers) file tax returns but pay no income taxes after all of their credits and deductions are taken into account. This is up from 29.9 million no-tax filers in 2000. Restoring the child credit to its old level would raise another $21 billion, leaving Uncle Sam $313 billion in the red.
When all is said and done, repealing all of the major Bush tax cuts would raise $164 billion in "new" tax revenues, roughly one-third of what is needed to erase the deficit. Bottom line, if our goal is to cut the deficit through higher taxes there is very little blood left in the stone of individual income to find new revenues. To put the $477 billion deficit forecast in perspective, it is well in excess of the $404 billion in income taxes that will be collected from every taxpayer making more than $200,000 this year. Thus to balance the budget on the backs of these upper-income Americans would require effective tax rates more than double what they are today, a level far beyond what they have ever been in our history.
To borrow a Clintonian cliché, the cause of today’s deficits is not a lack of tax revenue, "It’s the spending stupid." Truth be told, repealing the tax cuts won’t lower the deficit much, and neither party seems to want a balanced budget enough to cut spending.
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Scott A. Hodge is president and J. Scott Moody is senior economist at the Tax Foundation, a Washington-based non-partisan research group. |
