Hello! Hope you are doing well =) I want to spend a little time talking to you about taxes. Being an economics major, I really enjoy getting into “wonkish” talk about policies affecting the economy that some people say is too far out into the weeds for most to understand. First off, I give you more credit than that. If explained without terms that are unnecessarily convoluted, I think people are interested and want to know what different policies and actions will do to the economy.
Let us start by discussing the most imminent issue: President Obama wanting to raise taxes on those that earn above $250,000 per year. First off, there is no tax bracket that includes income specifically above $250,000 per year. The closest is the bracket making between $178,651 and $388,350 (33% tax rate), with the highest being $388,351 and above (tax rate of 35%). To even increase taxes as the President says he would like to do would require altering the tax rates of multiple income brackets, which is much trickier than just raising the rates on one bracket of income earners. Keep in mind I am not trying to bash the President, I am just breaking down his own numbers to try and explain things.
[For information on tax rates, check out the IRS PDF at http://www.irs.gov/pub/irs-drop/rp-11-52.pdf, or to find it easier look it up on Wikipedia, http://en.wikipedia.org/wiki/Income_tax_in_the_United_States]
The President says the tax hikes should bring in roughly $1.6 trillion over ten years. That works out to $160 billion per year. While that is by no means a small chunk of change, compare it to our deficits to get an idea of the numbers. This year we are running a $1.1 trillion deficit, with trillion dollar deficits on the horizon for the foreseeable future. If the President is correct in his estimations of new revenue, then we will still have at least a $940 billion deficit. We only solved 15% of our deficit! Don’t be fooled into thinking that raising taxes on the “wealthy” will take care of our problems.
[The information I got on our deficit came from a great website, usdebtclock.org, which gets its information from the CBO and Treasury Department. Here is an article explaining the President's plan for tax hikes: http://www.foxnews.com/politics/2012/11/14/obama-enters-fiscal-cliff-talks-calling-for-16t-in-tax-hikes/ ]
I get to go into the weeds here a bit, but there’s an important distinction people need to know about economic numbers. People can do two types of studies to come up with numbers from tax revenue, economic growth, etc. They are based on either static or dynamic analysis. Static analysis studies say people do not change their behavior due to changes in their situations (i.e. an increase in taxes, consumer confidence change, surprising market news). However, if you think about an example for yourself, would you change your behavior when circumstances change? If you are very un-confident about the economy, wouldn’t you spend a little less to make sure you had enough if things got worse? If tax rates for you went up, wouldn’t you do things a little differently if it means avoiding paying more money to the government? If you got a huge pay raise, wouldn’t you plan on spending more? These are things static analysis doesn’t account for, and what creates its biggest flaw. Dynamic analysis tries to take those factors into account, and while it is tough, it generally offers more accurate numbers than static analysis. So why is static analysis the most commonly used in economic studies? I have no idea. Maybe it’s because dynamic analysis is harder and more time consuming to do? Either way, when you look at the President’s estimates of how much extra money will come into the Treasury, he bases those numbers on the fact that they believe no one who has their taxes raised will change their behavior, and therefore affect how much they actually pay in taxes. This has turned out not to be the case in history; the higher tax rates are the more people try to avoid paying taxes.
So, if we can’t solve our problems by taxing those that make $250,000 and above, what is the next solution? Do we tax those making less than $250,000? If so, how much do their rates go up? Do we tax the middle class more? I thought that is what the President said he did not want to do. But unfortunately for the middle class, they pay the majority of income taxes, so they would be the biggest target to increase taxes and get the most money for the Treasury. The sad truth is that in order for us to “tax our way out of the deficit,” we would have to dramatically raise taxes on everyone in the United States. The federal government raises $2.4 trillion in total revenues per year! Unfortunately, we spend $3.55 trillion per year! That means in order for us to completely cover the deficit with tax increases, we would have to raise ALL taxes by 50%! That’s not just income tax, that’s gas tax, payroll taxes, corporate taxes, and more. Your costs of goods would increase, gas would be more expensive, and you would get less money from your paycheck. Does that seem like a good idea? Even if we did increase all taxes by 50%, do you think we would actually bring in 50% more revenue. I bet not, because I believe most people would change their habits and behavior to adjust to the new rates. Then we still wouldn’t have enough tax revenue to fund the government!
My belief is that the federal government is simply too big. We spend far too much money as a nation, and that is a problem we need to address. I have heard people say that we need a mix of tax rate increases to increase revenue and cuts in government spending. I totally agree about the government spending, however I have a different idea on taxes. Do you know the best way to increase tax revenue? To get the economy roaring back to health, being the great engine of productivity that it can be. More people earning a paycheck and paying taxes will far outstrip increases in revenue over just raising the rates on people. President Obama himself said in times of economic uncertainty the last thing we want to do is raise taxes. He was exactly right!
I believe if the President gets his tax rate increases that he wants we will see less than $160 billion per year in increased revenue. I do think we need an increase in tax revenues; however I think the best way to do that is by getting the economy back on track, and raising taxes is simply not the way to do that. My opinions on how to get the economy going strong again will definitely be discussed in the future. I hope you found this an interesting topic, and I hope this helped you understand the situation a little more than what the politicians would have you believe.
What are your thoughts? Should we raise taxes on Americans that make a lot of money even though it won’t fix our deficit problem? Is spending our real problem, or that taxes aren’t high enough? If we do raise taxes do you think we can actually bring in $160 billion per year? Do you believe changes in tax rates cause people to alter their behavior to avoid paying more in taxes? Feel free to comment. Thanks for reading, have a great day!