Does Raising Taxes Help the Deficit?

Current wisdom in Washington is that we need to raise taxes (particularly on “the rich”).  Here’s why it won’t work. President Obama’s deficit policy speech today emphasized that if government spending breaches a trigger level, tax increases should be triggered. He has it 100 percent backwards. I’ll explain.

We have a current tax policy that taxes higher income people more as a percentage of their income than those in lower income brackets. This is true even if you look at all Federal taxes, not just income taxes. 

The following chart, based on data from the liberal-leaning Tax Policy Center, makes this clear:


It can be seen that the highest earning group, at $212,666 and up, pays 40.3% of all Federal taxes, while the middle group (from $35,347 to $64,490 income) pays less than one quarter of that, at 10% of all Federal Taxes. These are facts, they don’t lie. But somehow the current Administration seems to think that higher income earners aren’t paying enough. In actual fact, the highest income earners pay over four times what the middle income bracket pays.

In this debate it is important to make sure you are not confusing tax rates with tax revenues or the actual dollars raised by a given tax. To the average progressive liberal, making the rich "pay more" sounds wonderful. It's just that it simply doesn't work.


As can be seen from the above graphic from the Heritage Foundation, we have not had tax revenues of more than 20% of GDP for any length of time since at least 1960. This is true even though we have had much higher tax rates in earlier years.  We once had a marginal rate of 91%. But despite higher tax rates, tax revenues still tended to trend around the level of 18% of GDP. The long-term average for actual tax revenues is 18% to 20% of GDP, regardless of current tax rates.

When you raise tax rates, investors and taxpayers change their behavior.  When capital gains tax rates go up, investors slow down realization of gains. So, despite a higher capital gains tax rate, the actual revenue received from capital gains taxes may not go up. Our current convoluted, ridiculous tax code similarly provides loopholes for those whose marginal tax rates have been arbitrarily raised.

Tax revenues have been remarkably steady at about 18-20% of GDP for 60 years even though the highest tax rates during the period fluctuated from a high of 91% to a low of just under 30%. 

The bottom line is, tax rates could never be increased high enough to close the budget deficit. The only common sense answer that will work is to reduce spending. Fortunately, there are some people in Congress who now understand this – but not enough!

While we’re at it – lets examine just who pays taxes in the US: 47% of filers pay NO FEDERAL INCOME TAX at all! That’s right. The top 1% of filers pay 38% of all tax revenue. And the top 5% of tax filers pay 60% of all tax revenue to the government. Do you really think we need raise taxes? I say, “Bullshit!”. Let’s get real, and deal with facts, figures and arithmetic for a change.

Kurt Brouwer who blogs for MarketWatch and the Wall Street Journal, has much more about this and related subjects on his blog.