Ready for a 150 Percent Income Tax Increase?

Published July 1, 2008

For years, taxpayer advocacy groups have been sounding the alarm about serious spending problems facing the nation and the lack of attention elected officials are paying to this growing fiscal disaster. Now come projections out of the Congressional Budget Office (CBO) on what further delay means to taxpayers and the economy.

According to a CBO report and letter dated May 19 to Rep. Paul Ryan (R-WI),

“Under current law, rising costs for health care and the aging of the population will cause federal spending on Medicare, Medicaid, and Social Security to rise substantially as a share of the economy. If tax revenues as a share of gross domestic product (GDP) remain at current levels, that additional spending will eventually cause future budget deficits to become unsustainable. To prevent those deficits from growing to levels that could impose substantial costs on the economy, the choices are limited: Revenues must rise as a share of GDP, projected spending must fall, or both.”

Infeasible Tax Hikes

If tax increases turn out to be the preferred solution for resolving the spending problem, the toll will be tremendous, CBO reports.

“With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double,” the CBO report says. “The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent.”

The report adds, “Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.”

Health Care Pressures

The report concludes, “The United States faces serious long-run budgetary challenges. If action is not taken to curb the projected growth of budget deficits in coming decades, the economy will eventually suffer serious damage. The issue facing policymakers is not whether to address rising deficits, but when and how to address them.

“At some point, policymakers will have to increase taxes, reduce spending, or both. Much of the pressure on the budget stems from the fast growth of federal costs on health care, so constraining that growth seems a key component of reducing deficits over the next several decades. A variety of evidence suggests that opportunities exist to constrain health care costs both in the public programs and in the health care system overall without adverse health consequences, although capturing those opportunities involves many challenges.”

So what do the current presidential candidates plan to do? They aren’t saying.

Jason Mercier ([email protected]) is director of the Center for Government Reform of the Washington Policy Center in Olympia, Washington.

For more information …

Congressional Budget Office report for Congressman Paul Ryan (R-WI) regarding government entitlement spending and the future impact on taxes:

Commentary by former U.S. Comptroller General David M. Walker concerning poor political leadership on entitlement spending control: