Economy & Budget

Will ending ‘tax cuts for the rich’ reduce the debt?

Will ending 'tax cuts for the rich' reduce the debt?

As of this writing, the national debt is more than $16 trillion, according to the Treasury, up from less than $11 trillion when Barack Obama was inaugurated. The Census estimates that there are less than 115 million households in the United States. That works out to more than $140,000 in debt per household – an increase of more than 50 percent since Obama’s inauguration.

Now, says the president, we must reduce the deficit. To do so, we can either cut spending or increase revenues. President Obama proposes to do the latter: In order to increase revenues, he says, we must permit some of the tax cuts enacted under President George W. Bush to expire on Dec. 31 – specifically, those for people with adjusted gross income in excess of $200,000, or families with adjusted gross income of more than $250,000.

Extending these cuts for another two years would “cost” the federal government about $42 billion next year, and about $38 billion in fiscal year 2014, according to the Congressional Joint Tax Committee (JCT) and Congressional Budget Office (CBO).

This estimate is consistent with CBO’s original projections, but that office’s track record in these matters is less than stellar: In August 2003, when Congress was debating the proposed Bush tax cuts, CBO projected that these reductions in tax rates would reduce the growth of tax revenues to about $84 billion below its “baseline” by 2007. Instead, according to the Obama White House, revenue growth increased to about $63 billion above CBO’s baseline over this period.

This is one example of a general problem with government estimates of the effects of tax changes: they generally underestimate incentive effects – sometimes with ludicrous results. According to Bruce Bartlett, a former Treasury economist, in response to a 1989 query from Senator Bob Packwood (R-Ore.), JCT reported that a 100 percent tax rate on all incomes over $200,000 would generate revenues of $204 billion in 1990, $232 billion in 1991, $263 billion in 1992, and $299 billion in 1993. It’s hard to imagine that many people would keep earning so much taxable income if they didn’t get any of it. Yet JCT had to assume not only that people would do so, but would actually increase their aggregate taxable income year after year.

Nevertheless, let’s assume that CBO’s projections of the effects of this tax hike are correct this time: Obama estimates that the national debt will increase by $2.5 trillion (to about $18.5 trillion) by 2014. If he gets his way–abolishing tax cuts for high earners–this will raise a cumulative total of just $80 billion by then, reducing Obama’s projected debt in 2014 by less than one-half of 1 percent.

CBO estimates that this miniscule reduction in the growth of the national debt will increase economic growth by 1.3 percent but, as the former chair of Obama’s Council of Economic Advisers warned in a 2010 paper, “tax increases appear to have a very large, sustained, and highly significant negative impact on output.

Raising taxes is risky when economic growth is barely above recession levels. Gross Domestic Product is hobbling along at an estimated 2 percent annualized growth, according to the Bureau of Labor Statistics. Even this anemic figure may be optimistic, given October’s sharp downward revision of last quarter’s estimated growth from 1.7 percent to 1.3 percent.

During Obama’s first term, the debt grew by $5 trillion. This was not because revenues fell: The Office of Management and Budget estimates that this year’s revenues are about $278 billion greater than in 2009, and total revenues since 2009 have exceeded $9 trillion; the problem is that President Obama spent $5 trillion more than this — more than $14 trillion.

Tax hikes may reduce the debt by 1 percent or 2 percent, as CBO projects, or they may backfire, tipping us back into recession. The only sure way to reduce the debt is to cut spending.

Mark LaRochelle was contributing editor at Consumers’ Research and editor at National Journalism Center. He is a regular contributor to Human Events and all of his columns can be found at HumanEvents.com.

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