The charged political atmosphere of the coming presidential elections is certain to generate a heated debate over whether or not to extend the Bush-era tax rates. In its recently released Budget and Economic Outlook the nonpartisan CBO lays out a pretty cut and dried case why we should.
According to the CBO, allowing the rates to expire would cause federal revenues to shoot to historic levels:
“Under current law . . . revenues are projected to grow even faster between 2012 and 2014: by a total of 31 percent, far outstripping the 7 percent total growth in GDP projected for that two-year period. As a result, revenues as a share of GDP are projected to rise by 3.7 percentage points during that period, reaching 20.0 percent of GDP in 2014 – a level that has been exceeded only once since World War II.”
The tax increases wouldn’t end there. Due to bracket creep revenues would continue to edge upwards annually, reaching 21 percent of GDP in the next decade. And while the higher revenues would help to decrease the deficit, it would also create an enormous drag on our economy:
“The pace of the economic recovery has been slow since the recession ended in June 2009, and the CBO expects that, under current laws governing taxes and spending, the economic will continue to grow at a sluggish pace over the next two years. That pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and next.
The “dampening effect” leads the CBO to predict that the jobless rate would rise to 8.9 percent by the end of 2012 and to 9.2 percent in 2013.
By contrast, if all the scheduled tax increases are avoided, revenues would still return to historical levels. Chart 1-7 shows that under the “alternative fiscal scenario,” in which the CBO makes certain policy assumptions, including the extension of the 2001 and 2003 tax rates, average revenues reach 18.3 percent by the end of the decade. That happens to be the rough equivalent of the average federal tax revenue since World War II.
Using that data it’s clear that spending and not taxes is what is historically out of whack. It’s also clear that if policymakers are to ever achieve fiscal sustainability while not wrecking the economy, they should extend the 2001 and 2003 rates while finding ways to spend less. May I suggest they start HERE.