The Hidden Tax
By Pejman Yousefzadeh Posted in Barack Obama | Economic Ignorance | Elections — Comments (1) / Email this page » / Leave a comment »
Andrew Biggs reveals that when it comes to tax policy, Barack Obama has got some 'splainin' to do:
As the presidential campaign heats up, a key issue is whether to extend the 2001 and 2003 income tax cuts, which expire in 2011. John McCain wants to make the tax cuts permanent. Barack Obama and Hillary Clinton want to let the rates rise.
Opponents of the tax cuts point to spending programs that could be financed by the extra revenues. Chief among these is Social Security. Sen. Obama's Web site, for example, argues that "extending the Bush tax cuts will cost three times as much as what is needed to fix Social Security's solvency over the next 75 years."
Such statements imply that if we return to the seemingly modest tax rates of the 1990s, we could fund the $4.3 trillion Social Security deficit, and so much more. As Mr. Obama recently told Fox News, "I would roll back the Bush tax cuts on the wealthiest Americans back to the level they were under Bill Clinton, when I don't remember rich people feeling oppressed."
This argument seems compelling, but it is misguided. In reality, repealing the tax cuts would raise taxes far above Clinton-era levels. Due to quirks in the tax code, average taxes would be almost 25% higher than during the 1990s.
Read on . . .
The culprit is "bracket creep." Income tax brackets have not adjusted for the growth in earnings, which means that if the Bush tax cuts are indeed rolled back,
. . . income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today - an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.
The economy is not recessionary yet. Perhaps we can get by on weak growth for a while before the economy finally picks up and avoid actual contractions. But if taxes are raised so dramatically, the economic pinch we have sought to avoid will finally arrive.
I should emphasize another portion of Biggs's editorial: Even if the current tax cuts remain in place, bracket creep will cause taxes to rise. Anti-tax cutters like to deride small-government/free market advocates for championing tax cuts at what the anti-tax cutters believe is a Pavlovian level. If they actually understood anything about bracket creep, however, they'd quit with the derision.