Reality Check: Higher Taxes Simply Won't Solve the U.S. Revenue Problem

Reality Check: Higher Taxes Simply Won't Solve the U.S. Revenue Problem
by J.T. Young
06/15/2011

Economically, liberals ascribe to this dictum: The floggings will continue until morale improves. At least that is what their call for higher taxes to close the federal deficit implies. Instead of seeing an economy struggling to recover, they see income awaiting redistribution.

The Left has been making much of the fact that federal tax revenue, as a percentage of the economy, is at its lowest since 1950. Instead of ascribing this to the recent recession, liberals attribute the federal deficit to it. Curiously, they do not manage to place the deficit at spending’s doorstep—or mention that its increase is even more pronounced—though it is at t its highest point since 1946 and exceeded only by WWII.

The most interesting part of liberals’ lament over receding revenues is their neglect of the obvious reasons for it.

First and foremost, federal revenues are where they are, because the economy is where it is. The federal tax system simply harvests income. If the nation’s income does not grow sufficiently, less rises to the height of the tax man’s scythe. Washington reaps less—along with everyone else. The proof of this came just four short years ago. In 2007, federal revenues equaled 18.5% of the gross domestic product (GDP). This is significant—besides being above the 40-year average, 18% of the GDP, according to the Congressional Budget Office (CBO)—because the above-average level was produced during the Bush tax cuts.

Liberals are exceedingly fond of blaming today’s low revenue levels on the Bush tax cuts. However, as a percentage of the GDP, the 2007 revenue level is also very close to the 19% average of the Clinton years.

Second, follow the Left’s logic: If the current tax system is the problem and the Bush tax system produced above-average revenue levels relative to the economy, then the fault lies … where? The answer would seem to be with tax changes made since Bush left office. That would mean under a Democratic Congress and administration. Strangely, the Left never makes that accusation.

Another flaw in the liberal argument is the assertion that federal revenues are low. The CBO estimates that even with a still-recovering economy, Washington will collect $2.228 trillion this year. That would have been sufficient to have balanced the 2003 federal budget.

The final flaw in the Left’s argument is that revenues are low because “the wealthy” are not paying their taxes. The top quarter of filers actually pay almost all the nation’s taxes. According to Congress’ nonpartisan Joint Committee on Taxation, the top 22.9% of tax filers pay 97.2% of all federal income taxes. More than half the population (54.2%) pays a negative share (-7%) of the federal income tax burden.

Nor are “the wealthy” just paying when it comes to income taxes. They also pay the overwhelming amount of total taxes—including payroll taxes: 90.9%. The bottom half pays just 6% of the total federal tax burden.

The reason “the wealthy” are not paying more is because they are not earning sufficient amounts to push enough of their income into the highest tax brackets. So, raising these brackets’ rates, into which income is not coming, would not produce as much revenue as the Left claims—unless they had more earnings to reach them.

The weak economy is simply not producing sufficient earnings—and not producing them in the segment of the population that pays the overwhelming amount of federal income taxes. Increasing the rate of taxation is not in itself going to solve the Left’s “revenue problem,” and it is hard to see how it would solve the economy’s.

Simply imagining that increasing tax rates on that quarter of the population now paying income taxes will produce proportionally higher revenues is just that: imagination. It takes no account of the impact such increases would have either on the economy or the earnings of those targeted to pay. It also would not come anywhere close to closing the Left’s “revenue problem.”

The problem with America’s revenue levels is not its tax system (though there are certainly many problems with it), it is the economy that it is taxing.

And the problem with Washington’s deficit levels is not its revenues, but its spending.

Still the Left seeks to get blood from our economic turnip.

It is said that when the only tool one has is a hammer, then every problem becomes a nail. Liberals’ tool is taxing, so every problem they encounter becomes a lack of revenue—even in a recession-recovering economy in which the real problem is a lack of earnings. Liberal ideology aside, the nation’s deficit problem is twofold: a prostrate economy is earning less and a profligate Washington is spending more.