The Congressional Budget Office (CBO) released its long-awaited long-term outlook on the budget today. As surely as the sun rises in the east, it shows there is no need to raise taxes.
According to the CBO, federal tax revenues will reach 18.5 percent of gross domestic product (GDP) in 2023, and 19.7 percent of GDP in 2038. Revenue historically averages 18 percent of GDP. In 2013, revenues will be slightly below average, at 17 percent of GDP, because the economy continues to recover too slowly from the Great Recession.
The CBO’s figures show that, despite President Obama’s incessant claims to the contrary, more than enough revenue is flowing into federal coffers. Once the economy shakes the uncertainty that President Obama’s policies are imposing on it—Obamacare, the Dodd–Frank financial reform law, CO2 regulations, and the President’s refusal to address the debt problem that will be brought on by the rapidly approaching explosion in entitlement spending—the economy will grow strong enough to push tax collections above their historical average.
The historical average of revenue is important because it is a level that, over time, the American people have determined they are willing to pay for the federal government. The historical average is also about as much taxation as the economy can withstand without larger adverse economic impacts.
Trying to raise taxes above the historical average would push collections higher temporarily before the economy and the people had time to react. A higher tax burden would hurt the economy as it would put more resources in the hands of Washington to spend, which it will most likely do less efficiently than the families and businesses that actually earn the money.
If revenue remains on the track that the CBO estimates, Congress should be talking about cutting taxes in a few years to get revenues down to their historical average.
A major reason taxes will be rising well above their historical average is because of the tax hikes that President Obama has already foisted upon the economy. Obamacare raises taxes by more than $770 billion over the next 10 years. In following years it will raise taxes even more, because one of its biggest increases, an excise tax on high-cost health insurance plans, doesn’t begin until 2018. The CBO predicts that the tax increases in Obamacare will be the second-largest contributor to revenue increases between now and 2038 (see p. 68 of the CBO report).
President Obama also insisted on raising tax rates from their Bush-era levels for high-income taxpayers. Earlier this year, Congress acquiesced to his long-standing demand and raised tax rates on income, capital gains, dividends, and estates. That fiscal cliff tax hike will also contribute to pushing tax collection higher, and, in fact, are already bringing more revenue into Washington.
The CBO report reinforces what has long been known. There is more than enough revenue flowing to the Treasury. Calls to raise taxes again are a distraction from the real problem in Washington today: too much spending