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Liberal Plan for Deficit? How About a 40% Tax Hike
April 21, 2011
Unsurprisingly, it was that last line that caused the uproar. In response, Douthat did some math and found that if the CBO’s projections come true (revenues jump from 18 to 23 percent of GDP) an average family of four’s payroll and income tax burden would jump from 15 to 25 percent. The marginal tax rate on labor income would rise from 29 percent to 38 percent. “Such unprecedented levels of taxation,” Douthat argues, “would throw up hurdles to entrepreneurship, family formation and upward mobility.”
Drum didn’t wait long before punching back. In a post from yesterday, he pointed to the fact that “The federal tax take was around 20% of GDP during the Clinton era.” Using this as a reference point he argues that letting the Bush tax cuts expire and then raising tax rates by an additional four or five GDP points wouldn’t “be wildly oppressive.”
There are numerous problems with Drum’s latest attempt to pull himself out of the intellectual hole he has dug. Most prominent among them is his odd choice of reference point. Although it is true that tax revenue did rise to 20 percent of GDP under Clinton, it is not, as Drum would have us believe, a case where policymakers can snap their fingers and have revenues soar. Tax revenues are much more closely tied to the performance of the economy than with tax rates. As Megan McArdle pithily notes, “saying ‘all we have to do is go back to the tax rates under Clinton’ is effectively saying ‘all we need is another asset price bubble that funnels a huge amount of money into the pockets of the rich.’” McArdle points out that if we 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 of 5-6% of GDP isn’t “wildly oppressive,” an argument much akin to the initial flash-point of this debate, his assertion that tax levels of 25 percent “just isn’t that much.” While such throw-away editorializing may work on a blog, in reality, such tax hikes would dramatically increase tax burdens for the average American.
Since World War II, the traditional demarcation line given the emergence of the modern welfare state, government revenues have hovered just around 18 percent of GDP. Much to liberal’s chagrin, even with the continuation of the Bush-era tax cuts, the United States will collect about 18 percent of GDP as the economy recovers.
So the problem is not revenues have suddenly plummeted, it’s that government spending will dramatically spike. While NTU firmly believes that we mustn’t the burden of Washington’s largesse on the backs of taxpayers and 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 phrase their planned tax hike smartly, saying revenues need to go up by 7 percent of GDP. But this obfuscates the reality for the average taxpayer. Using an 18 percent baseline, a 7 percent GDP increase, would mean that everyone’s taxes would have to go up by around 40 percent. And that huge revenue grab doesn’t buy us anything new, it’s solely to maintain entitlements as they are presently structured!
This online debate may go on forever. Drum even admits that “a lot of our disagreement is simply irreconcilable.” But let’s hope our representatives in Washington are not so ideologically stubborn. Let’s hope they don’t believe a 40 percent across the board tax hike “just isn’t that much.” Because it is that much. It would mean a fundamentally different life for the average American.
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