Tag: tax policy center

Tax Reform Revenues Wrongly Contrasted with Soaring CBO estimates

CBO Baseline Projected Revenue

When the Brookings Institution and Urban Institute claim any tax reform will “lose trillions” they are comparing their static estimates of revenues from those plans (which assume tax rates could double or be cut in half with no effect on growth or tax avoidance) to totally unrealistic “baseline” projections from the Congresional Budget Office.  Those CBO projections assume that rapid 2.4% annual increases in real hourly compensation over the next decade will push more people into higher tax brackets every year.  As a result, the average tax burden supposedly rises forever – from 17.7% of GDP in 2015 to 19.9% in 2045 and 23.8% by 2090.  And, typical of static estimates, this ever-increasing tax burden is imagined to have no bad effects on the economy.

Such a high level of federal taxation never happened in the past (20% was a record set in the tech stock boom of 2000) and it will never happen in the future.  In short, this is an entirely bogus basis by which to judge tax reform plans.

A far more sensible question would be this:

Will the Cruz or Rubio tax reforms raise just as much money as the Obama “tax increase” has – namely, 17.5% of GDP from 2013 to 2015. If so, then real tax revenues will grow faster after reform because real GDP growth will surely be at least 1.2% faster – or a middling 3.5% a year, which is all the cautious Tax Foundation estimates suggest.

The Something-for-nothing Quandary

Most of the debate over extending the Bush tax cuts has focused on whether to extend slightly lower marginal rates for higher earners who already bear a huge burden. But at the other end of the income spectrum, a growing share of Americans don’t pay income taxes. Indeed, the Bush tax cuts increased the share of U.S. households that pay no income taxes.

From the Wall Street Journal:

Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

A little more than half don’t earn enough to be taxed; the rest take so many credits and deductions they don’t owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.

As the price of something drops, the demand increases. For a growing share of Americans, government services are effectively “free,” so they are demanding even more and policymakers are giving it to them.

As the following chart shows, federal payments to individuals as a share of the economy have reached an all-time high after seventy years of steady growth:

George Bernard Shaw said that “A government which robs Peter to pay Paul can always depend on the support of Paul.” In order to head off the coming fiscal train wreck, Paul is going to need to be convinced that robbing Peter is no longer in his best interests. However, by foisting a larger share of the burden of government onto a smaller and smaller group of taxpayers, policymakers will make it more and more difficult for Paul to see the error of his ways.