There once was a time when American politicians could agree on policies with a handshake and move on to the other business of the day. Today, our elected officials’ decisions are driven by political survival in the 24-hour news cycle. The so-called “fiscal cliff” has become a rallying cry for statesmen on both sides of the aisle to campaign for their vision of America’s future, but in the interest of political expediency, many have forgotten their roots.
Some congressional Republicans have indicated that they will break with a decades-old Americans for Tax Reform pledge to oppose tax increases.
“A pledge you signed 20 years ago, 18 years ago, is for that Congress. The world has changed, and the economic situation is different,” said New York Rep. Peter T. King on NBC’s “Meet the Press,” regarding his intention to break the pledge he made not to raise taxes.
While Mr. King’s reasoning in breaking the pledge is flawed at best, too many congressmen and politicos are getting caught up in what a tax increase would mean for the clout of Americans for Tax Reform and its president, Grover Norquist, and failing to devote enough attention to the devastating long-term impacts of a tax increase.
The Democratic rallying cry to make the rich pay “their fair share” might make for a good sound bite, but when we look at the numbers, it’s quite clear just how uninformed many politicians are on the issue. Accounting for federal income taxes and tax credits, the richest 5 percent of Americans paid almost 30 percent of taxes in 2009. In fact, the wealthy have always paid a large percent of the overall tax burden. What’s surprising, however, is that the government’s total tax receipts are about the same in relation to the overall economy, regardless of tax rates.
Instead of looking at the raw numbers, tainted by years of poor policy coming out of the Federal Reserve, a more useful way to examine federal tax revenue is to look at it as a fraction of gross domestic product. Each year, the government takes a portion of the economy for itself, and over the past half-century, the government’s slice of the overall economic pie has stayed at 18 percent.
In 1987, the government lowered the marginal income tax rate to around 39 percent, then 28 percent in 1988, back up near 40 percent in 1993, and then down again to 35 percent in 2003, where it remains today. Despite the fluctuation in the top tax rate through this period, the government’s revenue remained just under 18 percent of GDP. Even the capital gains tax and the corporate tax rate had little effect on the portion of GDP that went to the government.
One might assume that the extra burden would be borne by middle-class taxpayers. The average marginal rate — the income tax rate applied to the average American — still has little effect on the portion of GDP the government collects as tax revenue.
Instead of attempting to find more revenue by increasing taxes for certain income brackets, it makes much more sense to let people keep their hard-earned money and focus on growing the economy. After all, during the next decade, 18 percent of a slowly growing economy is a lot less than 18 percent of a quickly growing economy.
At the end of the day, the deficit is so large that there aren’t even enough rich people to tax to raise enough money to balance the budget. Instead of arguing about a tax hike for the wealthy — or what it would mean for Mr. Norquist — let’s focus our efforts on meaningful solutions like cutting spending and reforming entitlements.
Michael Moroney is the director of communications at the Franklin Center for Government and Public Integrity.