Tax Hikes Are Not the Right Path to Reducing the Deficit

Kathryn Nix /

Congress must soon reach a consensus on whether, and on whom, they will raise taxes in 2011. With the economy at the forefront of Americans’ concerns, the effects of raising taxes for any income bracket are a serious matter. Proponents of tax hikes argue that reducing the deficit through increasing tax revenues is more important. That argument raises a number of serious questions.

But what about the economy? The Washington Post’s Lori Montgomery writes that “the economy is sluggish and the national debt is soaring to worrisome levels.” She’s right, of course. But the last thing Congress should do in a faltering economy is raise taxes, as breaking research from Heritage’s Center for Data Analysis reveals. According to its report, which compares the President’s plan to raise taxes on the rich only with a scenario in which all the cuts are extended for everyone, allowing tax hikes for the top income brackets alone would cause employment to fall by an average of 693,000 jobs each year over the next decade. That’s in addition to already-high unemployment.

At the same time, inflation-adjusted gross domestic product (GDP) would decrease by $1.1 trillion between 2011 and 2020. Other effects would include a decrease in personal income and consumption and reduced investment. Finally, CDA predicts that government income from tax revenues would only be about 34 percent of what is projected due to slower economic growth. They conclude, “Those who will shoulder the burden of this proposed tax increase will not be only those Americans with relatively high incomes, but all the rest whose lives are affected by the investments and business decisions of those taxpayers in the high-income classes.” In a shaky economy, causing further damage is the last thing Congress should do.

Would allowing the 2001 and 2003 tax cuts to expire really balance the budget? Montgomery also writes that “letting tax rates spring back to pre-Bush levels for all taxpayers would bring the country within striking distance of meeting President Obama’s goal of balancing the budget, excluding interest payments on the debt, by 2015.” Few advocate raising taxes for all income levels during a stagnant economy. Moreover, this claim likely relies on the Congressional Budget Office’s score of President Obama’s budget, which assumes several other tax increases indicated by the President’s budget.

Adding the complete expiration of all of the 2001 and 2003 tax cuts to this list would raise taxes to unseen-before levels. Finally, Heritage economist Karen Campbell explains that “if you place higher taxes on labor and capital income, you get less labor and capital income. Therefore, the dynamic revenues from the higher tax rates would actually be less than expected.” So allowing all the cuts to expire would not only hurt the economy but increase revenues to a lesser extent than projected.

So how do we both reduce deficits and keep current tax rates? Montgomery is right that the debt is out of control, but long-term fiscal problems lie in the unaffordable benefits promised by growing entitlement programs and out-of-control spending. Heritage budget expert Brian Riedl writes, “Even if the 2001 and 2003 tax cuts and the [Alternative Minimum Tax] fix are extended, revenues will remain above the historical average and eventually reach record levels. This is true by any measure—nominal dollars, inflation-adjusted dollars, and percentage of the GDP.” Deficit reduction should thus focus on spending—the true root of the problem. By maintaining current tax levels and reducing spending to historical levels, deficits can be reduced without straining American taxpayers.