The Impact of Looming Tax Increases

With a huge tax increase scheduled to begin in January, the debate has been turned upside down, distorting the picture of what is at stake – especially in light of the unprecedented deficits burdening the Federal budget. The way the subject is framed has created a bias toward higher taxes, and has clouded the critical issue of how to maintain a climate favoring needed economic and job growth.

To understand the subject properly, the following points are critical:

  • Higher Taxes Stifle Growth. Higher tax rates will further damage a weak economy. Tax increases not only drain economic resources, but also stifle incentives to greater productivity and investment. The scheduled January tax increases could reduce employment growth by as many as 1.2 million jobs, based on Congressional Budget Office estimates.

  • Tax Hikes Cannot Catch the President’s Spending. Spending in the President’s budget surges to record levels, and by decade’s end will consume more than one-fourth of total U.S. economic resources. The pace of spending is so rapid that even raising taxes nearly $4 trillion over the next 10 years would not catch up.

  • Tax Relief Did Not Cause Today’s Deficits. With the full 2001/2003 tax relief provisions implemented, Federal revenue rose to 18.5 percent of gross domestic product in fiscal year 2007, well above the 50-year historical average of 18 percent. Revenue plunged after that because of a financial crisis and a deep recession, not because of tax relief.

  • The Tax Debate Is Upside-Down. Baseline budgeting gives the false impression that simply keeping tax rates the same as they are today is somehow a new tax cut that will increase deficits and must be “paid for.” It is nonsensical to make taxpayers “pay for” simply avoiding a tax increase.

  • Tax Burdens Already Are Skewed Toward Upper Incomes. Limiting tax increases to “the rich,” as the President and the Democratic Leadership in Congress propose, will create additional barriers to job-creating investments, and will further distort the distribution of U.S. tax burdens, in which those earning in the top 10 percent of income pay more than 70 percent of Federal income taxes. In addition, complaints about current tax laws providing “tax cuts for the rich” ignore the impact raising the top tax rates will have on small businesses, the most vigorous job producers in the country.

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