Government Bytes


Liberal Plan for Deficit? How About a 40% Tax Hike

by Brandon Greife / /

Unsurprisingly, it was that last line that caused the uproar.In response, Douthat did some math and found that if the CBO’s projections cometrue (revenues jump from 18 to 23 percent of GDP) an average family of four’spayroll and income tax burden would jump from 15 to 25 percent. The marginaltax rate on labor income would rise from 29 percent to 38 percent. “Such unprecedentedlevels of taxation,” Douthat argues,“would throw up hurdles to entrepreneurship, family formation and upwardmobility.”

Drum didn’t wait long before punching back. In a post fromyesterday, he pointed to the fact that “The federal tax take was around 20% ofGDP during the Clinton era.” Using this as a reference point he argues thatletting the Bush tax cuts expire and then raising tax rates by an additional four or five GDP pointswouldn’t “be wildly oppressive.”

There are numerous problems with Drum’s latest attempt topull himself out of the intellectual hole he has dug. Most prominent among themis his odd choice of reference point. Although it is true that tax revenue didrise to 20 percent of GDP under Clinton, it is not, as Drum would have usbelieve, a case where policymakers can snap their fingers and have revenuessoar. Tax revenues are much more closely tied to the performance of the economythan with tax rates. As Megan McArdle pithily notes,“saying ‘all we have to do is go back to the tax rates under Clinton’ iseffectively saying ‘all we need is another asset price bubble that funnels ahuge amount of money into the pockets of the rich.’” McArdle points out that ifwe exclude the height of the stock market (or, if you prefer, the dot-com)bubble, the average tax revenue take under Clinton was around 18.5 percent.

We also have to dispute Drum’s notion that a tax hike of5-6% of GDP isn’t “wildly oppressive,” an argument much akin to the initialflash-point of this debate, his assertion that tax levels of 25 percent “justisn’t that much.” While such throw-away editorializing may work on a blog, inreality, such tax hikes would dramatically increase tax burdens for the averageAmerican.

Since World War II, the traditional demarcation line giventhe emergence of the modern welfare state, government revenues have hoveredjust around 18 percent of GDP. Much to liberal’s chagrin, even with thecontinuation of the Bush-era tax cuts, the United States will collect about 18percent of GDP as the economy recovers.

So the problem is not revenues have suddenly plummeted, it’sthat government spending will dramatically spike. While NTU firmly believesthat we mustn’t the burden of Washington’s largesse on the backs of taxpayersand should instead find ways to curb the growth in government spending,liberals like Drum believe we should raise taxes to 25 percent of GDP. They phrasetheir planned tax hike smartly, saying revenues need to go up by 7 percent ofGDP. But this obfuscates the reality for the average taxpayer. Using an 18percent baseline, a 7 percent GDP increase, would mean that everyone’s taxeswould have to go up by around 40 percent.And that huge revenue grab doesn’t buy us anything new, it’s solely to maintainentitlements as they are presently structured!

This online debate may go on forever. Drum even admits that “alot of our disagreement is simply irreconcilable.” But let’s hope ourrepresentatives in Washington are not so ideologically stubborn. Let’s hopethey don’t believe a 40 percent across the board tax hike “just isn’t thatmuch.” Because it is that much. It would mean a fundamentally different lifefor the average American.