NCPA - National Center for Policy Analysis


April 17, 2007

The economic losses that result from increased taxes fall mainly on low- and middle-income earners in the form of salary increases not obtained and jobs not gotten (or lost); and this burden applies irrespective of whether those who lose out pay or do not pay income taxes.  The regressive nature of the adverse economic fallout from high taxes cannot be avoided by concentrating those taxes on ostensibly rich capitalists.  In fact, a new study by Gregory Mankiw confirms that concentrating taxes on capital exacerbates the damage to the economy.

Reduced to its essence, Mankiw concludes that:

  • A $1 tax cut on dividends would reduce government revenue collections by about 50 cents, after taking into account taxes on $2 of additional economic growth induced by the tax cut.
  • A $1 tax cut from an across-the-board rate reduction would cost the IRS about 77 cents, after taking into account taxes on the 95 cents of additional economic growth induced by the tax cut.

The Mankiw study confirms that if Congress is willing to forego 50 cents of revenue, the economy would grow and people would have $2 more income.  If given the choice, most people would take the $2.

Now apply the conclusions of the Mankiw study in reverse -- to tax increases.  The results illuminate the high costs of providing the government with an additional $1 to spend:

  • A purported $1 tax increase on dividends only nets the Treasury 50 cents -- but costs Americans $2 in lost income, plus 50 cents in tax.
  • When a higher rate is levied on all forms of income, an attempted $1 tax increase yields only 77 cents -- but costs Americans 95 cents in lost income plus 77 cents in tax.
  • If the government were to kick up the tax increases enough to collect a full additional $1, the cost to the public would be between $2.25 and $5, counting both tax paid and income lost.

Source: Ernest S. Christian and William E. Frenzel, "The Fiscal Bottom Line," Wall Street Journal, April 16, 2007.

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