Are Income Tax Rates the Problem?
Everyone is discussing tax cuts -- and tax hikes -- right now. The prevailing opinion seems to be that the tax cuts for "the rich" (defined as anyone making more than $500,000 a year) have to go.
The problem, as I see it, is that the income tax rate essentially doesn't matter. Income tax revenues (the actual amount of money collected) have stayed flat over the last 50 years even as income tax rates have fluctuated wildly.
Cutting taxes for the rich hasn't led to a massive drop in tax revenues. When Bill Clinton left office, in 2000, income taxes made up 12% of GDP. In 2008, income taxes made up 10% of GDP. As a percentage of GDP, the Bush tax cuts led to a very small drop in tax revenue. In actual dollar terms, the Bush tax cuts didn't create any drop in tax revenues. In 2000, the government collected $1.5 trillion of incomes taxes. In 2008, the government collected $1.8 trillion of income taxes.
In fact, federal government revenues have more than tripled since 1965.
Note the uptick in federal revenue starting in 2004, after the Bush tax cuts were passed. Taxes as a percentage of GDP stayed relatively constant (or fell slightly) even as tax revenues were increasing dramatically. That's because the economy started growing as soon as the tax rates were cut. People paid more in taxes even as their tax rates fell. From a government's perspective, that looks pretty good to me. You could argue that the growth is coincidental to the tax rates. (I don't believe that but you could choose to argue that.) But I don't see how you can argue that the tax cuts actually cut federal revenues or hurt the economy.
The real problem with the federal budget isn't tax cuts it's spending. We don't have a revenue problem, we have a spending problem. In 2000, the federal government spent $3.2 trillion. In 2008, the federal government spent $5.3 trillion. In eight years, federal spending increased by an incredible 65%. Why do we even have anyone arguing that the government needs even more money? Does the government do everything so efficiently that there is no fat anywhere in the federal budget? When was the last time you saw legislators seriously looking for money to cut out of the budget instead of looking for more ways to tax citizens? When was the last time you saw a government agency get its budget truly cut instead of just getting a cut in the rate of increase?
Income tax rates aren't the problem. Government spending is the problem. Until we start talking seriously about cutting spending, we won't make any progress on cutting the federal deficit and the federal debt.
If you want some ideas about what spending to cut, I'd start with Downsizing the Federal Government.
(Numbers from US Government Revenue and the Heritage Foundation.)
This entry was tagged. Fiscal Policy Income Taxes