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Looming tax hike not the biggest ever

- Associated Press - Tuesday, June 12, 2012

Republicans are calling it "Taxmageddon," the big tax increase awaiting nearly every American family at the end of the year, when a long list of tax cuts is scheduled to expire unless Congress acts.

It would be, GOP leaders in Congress say again and again, "the largest tax increase in American history."

Except it wouldn't be, not when you take into account population growth, rising wages and, most importantly, the size of the U.S. economy. When those factors are taken into account, the largest tax increases were those imposed to help pay for World War II - back when the U.S. raised additional revenue to pay for wars instead of simply borrowing.

A huge collection of tax cuts is scheduled to expire at the end of the year, affecting families at every income level and businesses of many stripes. Many of the tax cuts were first enacted under President George W. Bush and extended under President Obama.

If Congress does nothing, income tax rates would go up, estate taxes and investment taxes would increase and the alternative minimum tax would hit millions of middle-income people. A temporary payroll tax cut that has benefitted nearly every wage earner in 2011 and 2012 would expire, costing the average family an additional $1,000 a year.

In addition, dozens of other tax breaks for businesses and individuals that are routinely renewed each year did expire at the end of 2011. Congress was expected to renew many of them by January, so taxpayers could still claim them on their 2012 tax returns.

According to figures from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation, federal taxes would increase by about $423 billion next year. Still, that would pale in comparison to the taxes imposed to help finance World War II.

Before the 1940s, the individual income tax applied to only a small percentage of the population. By the end of war, the income tax was levied on most working people, with a top tax rate of 94 percent on income above $200,000.

By comparison, the current top rate is 35 percent, on taxable income above $388,350. If Congress does nothing, the top rate would return to 39.6 percent next year - the same rate that was in place for most of the 1990s.

In dollars, next year's tax hikes would be the biggest. But the population is more than twice as big as it was in the 1940s and the size of the U.S. economy is 80 times bigger. That's why economists usually measure taxes and government spending as a share of the economy.

The 1942 tax increase represented more than 5 percent of the U.S. economy, as measured by the gross domestic product. The 1941 tax increase was 2.2 percent of GDP, according to a Treasury Department paper published in 2006.

Next year's looming tax increase would represent 2.6 percent of GDP - a huge hike but not the biggest.

Measured another way, the 1942 tax hike increased federal revenue by a whopping 71 percent, according to the Treasury Department paper. The 1941 tax hike increased federal revenue by 32 percent.

By comparison, next year's potential tax hike would increase federal revenue by 16 percent, according to theCongressional Budget Office.

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