As the countdown to the Fiscal Cliff continues, tax increases seem to be the only way Democrats in Congress think that we can close the deficit gap. But Michael Barone points out that, no, tax increases alone will never be enough. It’s not the panacea that Democrats claim it to be. He covers some ideas that I’ve mentioned here, that entitlement spending alone is enough to keep a deficit going. You might think tax increases are helping, but we’d just be sinking slower. Some I’ve engaged in on this subject call that the “right direction”. No, the right direction would be to start rising and get above the water level.

Another point is that higher tax rates don’t typically produce more tax revenue. From the 1940s to the 1960s, when the top marginal tax rate was 91% (91%!), tax revenues never topped 20% of GDP. Why? Because with a tax rate like that, people, spend more time looking for tax shelters and other means, legal and illegal, to keep from paying those high rates. Thus, Congressional Research Service notes that, during those times of 91% top rates, the tax rate on earners in the top 1/100th percent were paying only 45%. Now, I understand that only income over a certain amount was charged that 91% rate, but even the tiniest sliver of earners at the top, the absolute richest of the rich, were still paying an aggregate of less than half the rate. Some studies put it at 1/3rd the rate. This is simple pain avoidance.

And since 1948, with up economies and down, with huge marginal tax rates and smaller ones, under Republican Presidents or Democratic, the total US tax revenue taken in as a percentage of GDP has stayed remarkably consistent between 15 and 21%. These charts are worth checking out. They show this, as well as how other things, like federal debt or government expenditures, have changed relative to GDP. It is really worth your time to check out.

Filed under: Economics

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