NCPA - National Center for Policy Analysis

TAX HIKES REDUCED FEDERAL REVENUE

January 24, 1996

If the goal of higher taxes is to raise government revenue, then the Clinton administration shot the country in the foot in 1993. Tax increases that year actually reduced government income, according to a new study from the National Bureau of Economic Research.

  • In 1993, the Democrats lifted marginal tax rates to 36 percent from 31 percent on incomes between $140,000 to $250,000 per year.
  • Rates on incomes above $250,000 were increased to 39.6 percent.
  • Those hikes raised $8.8 billion in revenues.
  • But without them, the IRS would have collected $19.3 billion.

Why? Because high-income taxpayers took bonuses and other income in December of 1992 to avoid the higher rates just around the corner. Moreover, higher-income taxpayers worked less in 1993 and took more of their pay in the form of tax-free fringe benefits. Their actions were solely a reaction to the tax hikes, and they cost the economy. Every dollar paid to the IRS caused taxpayers a loss of three dollars: one to the IRS and two in changed work or compensation activities.

Because people change their behavior in the face of changed circumstances, the federal government never gets much more from taxpayers than about 19 percent of gross domestic product. But if people worked more and reported more income after taxes were cut, budget balancers would get 19 percent of a bigger GDP.

Source: Perspective, "Cut Taxes First," Investor's Business Daily, January 24, 1996.

 

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