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The public policy blog of the American Enterprise Institute
President Obama says we need a “balanced approach” to deficit reduction. We need tax increases and spending cuts. And to reinforce that point, liberals note that the U.S. tax burden is at its lowest levels since just after World War II. From 2009-2012, revenue as a share of GDP has averaged 15.4% of GDP vs. 13.9% from 1948-1951 and 18.1% overall in the postwar era. Clearly there is plenty of room for a big tax hike, right?
But that analysis is somewhat misleading. Tax revenue is low because of the Great Recession and its aftermath. Growth is down, so taxes are down. As the economy continues to slowly recover, revenue will rise.
Now imagine if we didn’t raise taxes as Obama wants to do. No tax hikes. Imagine if we a) kept all the expiring 2001 and 2003 tax cuts, b) started indexing the Alternative Minimum Tax for inflation so it wouldn’t hit more and more taxpayers.
How would that affect tax revenue? The Congressional Budget Office tells us:
Under that scenario, revenues from 2013 to 2022 would average about 18 percent of GDP, which is equal to their 40-year average.
Indeed, we would be back to the postwar average of 18.1% by 2016.
To recap: If we keep the status quo tax situation, revenue as a share of GDP will rise by nearly 40% — from $2.4 trillion in 2012 to $3.4 trillion in 2016 — through greater economic growth. Over the next decade, tax revenue would rise by $2.2 trillion.
And growth won’t even be that great, according to the CBO, with GDP increasing by an annual average of closer to 2% than 3% between 2013 and 2022.
Wouldn’t it be better to boost to raise tax revenue — and incomes — through economic growth than by raising tax rates? It’s not as if economic policy is optimized right now. Washington can do better — and should — before asking Americans, including entrepreneurs and small business, to pay more.
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