The charged political atmosphere of the coming presidentialelections is certain to generate a heated debate over whether or not to extendthe Bush-era tax rates. In its recentlyreleased Budget and Economic Outlook the nonpartisan CBO lays out a pretty cutand dried case why we should.
According to the CBO, allowing the rates to expire wouldcause federal revenues to shoot to historic levels:
“Under current law . . . revenuesare projected to grow even faster between 2012 and 2014: by a total of 31percent, far outstripping the 7 percent total growth in GDP projected for thattwo-year period. As a result, revenues as a share of GDP are projected to riseby 3.7 percentage points during that period, reaching 20.0 percent of GDP in2014 – a level that has been exceeded only once since World War II.”
The tax increases wouldn’t end there. Due to bracket creeprevenues would continue to edge upwards annually, reaching 21 percent of GDP inthe next decade. And while the higher revenues would help to decrease thedeficit, it would also create an enormous drag on our economy:
“The pace of the economic recoveryhas 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 togrow at a sluggish pace over the next two years. That pace of growth partlyreflects the dampening effect on economic activity from the higher tax ratesand curbs on spending scheduled to occur this year and next.
The “dampening effect” leads the CBO to predict that thejobless rate would rise to 8.9 percent by the end of 2012 and to 9.2 percent in2013.
By contrast, if all the scheduled tax increases are avoided,revenues would still return to historical levels. Chart 1-7 shows that underthe “alternative fiscal scenario,” in which the CBO makes certain policyassumptions, including the extension of the 2001 and 2003 tax rates, averagerevenues reach 18.3 percent by the end of the decade. That happens to be therough equivalent of the average federal tax revenue since World War II.
Using that data it’s clear that spending and not taxes iswhat is historically out of whack. It’s also clear that if policymakers are toever achieve fiscal sustainability while not wrecking the economy, they shouldextend the 2001 and 2003 rates while finding ways to spend less. May I suggestthey start HERE.