Largest Tax Increase Since World War II
Kurt Brouwer April 8th, 2008
As this chart (from the article below) points out, we may be in for the biggest income tax increase in many decades. The genesis of this increase would be the termination of the tax cuts of 2001 and 2003. If those tax cuts fade into history, then income tax rates will skyrocket. And, estate taxes will hit millions more Americans when they die. Here is a taste of what’s to come:
- A huge boost in tax rates on dividends
- A large jump in capital gains rates
- The marriage tax penalty would be back
- The child tax credit would be reduced
- Estate tax exemptions would be cut drastically to $600,000
This piece from the Wall Street Journal (registration may be required) spells out what will happen if the tax cuts expire [emphasis added]:
The Coming Tax Bomb (Wall Street Journal, April 8, 2008, John F. Cogan & R. Glenn Hubbard)
…This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson’s surcharge to finance the war in Vietnam and the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. The increase would push total federal government revenues relative to GDP to 20%.
Why this large tax increase? The tax code changes enacted in 2001 and 2003 are scheduled to expire at the end of 2010. If they do, statutory marginal tax rates will rise across the board; ranging from a 13% increase for the highest income households to a 50% increase in tax rates faced by lower-income households. The marriage penalty will be reimposed and the child credit cut by $500 per child. The long-term capital gains tax rate will rise by one-third (to 20% from 15%) and the top tax rate on dividends will nearly triple (to 39.6% from 15%). The estate tax will roar back from extinction at the same time, with a top rate of 55% and an exempt amount of only $600,000. Finally, the Alternative Minimum Tax will reach far deeper into the middle class, ensnaring 25 million tax filers in its web…
This tax increase is being touted as the fiscally responsible thing to do because government needs the money. First, when it comes to spending our money, I do not see much in the way of fiscal responsibility from our political leaders in Washington — on either side of the aisle. In fact, they seem to know about as much about fiscal responsibility as my eight-year-old does. Maybe less.
Second, raising tax rates is not the best way to raise tax revenues, but rather the key is to boost economic activity. This piece below demonstrates that tax revenues surged over the past few years despite the 2001 and 2003 income tax cuts. In fact, tax receipts began booming almost as soon as the 2003 cuts were enacted [emphasis added].
The Tax Story Media Inevitably Bury (Investor’s Business Daily, June 13, 2007)
Beyond The Bias: Second In A Series
More on this series
“…A cursory look at the data — and that’s really all it takes, so shame on the media for misreporting — show tax revenues have surged since the tax cuts went into effect. And this is the case whether you you count them on a nominal basis, an inflation-adjusted basis or as a share of GDP…
…Tax revenues will be about 18.5% of GDP this year — above the average of 18.2% since 1960. As for inflation-adjusted tax revenues — a little-used but equally telling statistic — they’ll reach an all-time high of $2.013 trillion. That’s higher even than in the last year of the dot-com boom. And by the way, it’s an astounding 26% gain since 2003 — after inflation…”
The key to solving the Federal budget deficit in my opinion is spending restraint, not higher income taxes. Rather than raise taxes and add a further drag on the economy, we simply need Washington to modestly slow down the spending.
One of the stirring cries that led to the American Revolution was:
“Taxation without representation is tyranny. “
—Attributed to James Otis, Boston lawyer and politician
Based on the misleading rhetoric we are hearing from our political leaders, I think it is safe to say:
“Taxation with representation ain’t so hot either.”
—Gerald Barzan
Via: Greg Mankiw
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