How else can you close the deficit but by taking nearly everything away from everyone who is productive?
With surging federal spending pushing the deficit to new heights, a new Tax Foundation study finds federal income tax rates would have to roughly triple to close the nation’s staggering budget deficit in 2010.
“Federal government spending levels are so high that even if policymakers were willing to stop debt-financing government services, the federal tax system in its current form wouldn’t be able to raise that much,” said William Ahern, Tax Foundation Director of Policy and Communications and author of the new study.
To close the deficit, federal income tax rates for joint filers which today range from 10 percent to 35 percent would have to be increased to between 27.2 percent and 95.2 percent—a tax hike of unprecedented size.
“If high-income people had to pay a federal tax rate over 90 percent, plus state and local income taxes and other taxes, total tax rates would be well over 100 percent for many households,” said Ahern.
A Widening Chasm
According to the study, if Congress closed the 2010 deficit through higher income tax rates across the income spectrum, the average tax payment of someone making between $75,000 and $100,000 would jump from the current $7,055 per year to a staggering $20,515 per year.
For upper-income taxpayers, the tax hike would be enormous. Families earning more than $1 million per year would see their federal tax bills climb from $800,000 per year to nearly $2 million.
“Even in 2012 when the President’s Budget projects a lower deficit, tax rates would still need to be prohibitively high in order to balance the budget,” said Ahern. “Tax rates would need to nearly double, with rates ranging from 18.7 percent to 74.1 percent.”
Economists debate the extent to which modest tax rate increases encourage workers to work less and entrepreneurs to risk less, according to the study. But the confiscatory tax rates that would be necessary to balance the budget in the next several years would almost certainly dampen prospects for a U.S. economic recovery.
In 2010, the federal government plans to spend $3.8 trillion, the largest annual expenditure ever. On the revenue side, taxes will bring in about $2.3 trillion, leading to a federal shortfall of $1.5 trillion. That translates into a federal budget that will spend $33,000 per American household, but raise only $19,000 in taxes.
“Although President Obama and the Congress do plan to raise taxes, they also have new spending plans,” said Ahern. “That leaves the budget with historically huge deficits throughout the next decade.”
The new study uses the Tax Foundation’s “microsimulation model” to project how much revenue a broad-based increase in federal income tax rates would generate. As the study shows, today’s chasm-like deficits simply cannot be closed with higher federal income taxes alone.
“Even when the deficit is projected to be as ‘low’ as it is in 2012 and 2013, it is probably not possible to close the deficit with income tax hikes,” said Ahern. “The spending side will have to be addressed as well.”