Where's the Best Place to Get More Tax Revenue?


Posted by Ryan Ellis on Monday, July 11th, 2011, 2:54 PM PERMALINK


From President Obama today at his press conference:

"What we have said is as part of a broader package we should have revenues, and the best place to get those revenues are from folks like me who have been extraordinarily fortunate, and that millionaires and billionaires can afford to pay a little bit more..."

Is this true?  Is the best way to raise additional tax revenue by raising the top marginal tax rate?

Not according to CBO:

  1. Every 1 percentage point increase in the top marginal tax rate supposedly yields $84 billion in tax revenue over ten years.  In order to raise $1 trillion in net taxes (the President's seeming goal), the top rate would have to be raised to a whopping 52 percent.

    Keep in mind that this demand for $1 trillion in higher tax revenues would be on top of the scheduled top rate hike from 35 to 39.6 percent in 2013.  If the tax revenues came from the rate side alone, the President would need a top marginal tax rate hike of 12 percentage points above scheduled 2013 levels.
     
  2. This assumes, of course, that small business owners (a majority of whose profits are taxed at this top rate) don't change their behavior, which of course they would.  Families earning that amount of money can and will change their income patterns to ride out the storm.
     
  3. President Obama doesn't have to target the top rate, of course.  CBO provides him with a whole menu of tax hike options.  He could raise the capital gains tax by 21 percent, which would cause it to rise from 15 percent today to nearly 45 percent in 2013 (keep in mind that the rate is scheduled to rise to 20 percent in 2013, plus this surtax, plus the Obamacare 3.8 percent capital gains surtax). 

    He could also phase out itemized deductions for these families, which would cause a massive de-capitalization of household and business savings to government coffers.
     

But is this really the "best" way to raise tax revenue?  Isn't it logical that job creators and investors would go on some sort of a Randian capital strike?  Isn't there a better way?

There is--it's called economic growth.  One of the most under-appreciated tables in CBO's "Budget and Economic Outlook" is Table B-1 ("How Selected Economic Changes Might Affect CBO's Baseline Budget Projections"). 

This table provides a pretty handy rule of thumb:

For every 1 percentage point increase in GDP growth above baseline, federal tax revenues for the 2012-2021 decade can be expected to rise by $2.66 trillion.

That's a much better way to get tax revenue growth than by scaring away job creators and pushing investors to the sideline. 

How do you squeeze another percentage point out of CBO's economic growth projection?  CBO is projecting a measly 2.4 percent average growth rate this decade--20 percent below the long-run real GDP growth trend of 3.0 percent.  Things like repealing Obamacare, getting the EPA and the NLRB out of corporate boardrooms, and rolling back the Dodd-Frank law are a start.  To really finish the job, though, we'd need revenue-neutral tax reform with top personal and corporate rates no higher than 25 percent.

What do you think?  Should tax revenues be maximized by economic growth, or by hiking taxes on job creators?

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