THE COMING TAX BOMB
April 8, 2008
We stand on the verge of a very large tax increase, one that will occur unless the next Congress and president agree to rescind it. Letting the Bush tax cuts expire will drive the personal income tax burden up by 25 percent -- to its highest point relative to gross domestic product (GDP) in history, says John Cogan, a senior fellow at the Hoover Institution, and R. Glenn Hubbard, Dean of Columbia University Business School.
- 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 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, ranging from a 13 percent increase for the highest income households to a 50 percent increase 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 percent from 15 percent) and the top tax rate on dividends will nearly triple (to 39.6 percent from 15 percent).
- The estate tax will roar back from extinction at the same time, with a top rate of 55 percent 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.
As has so often been, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won't lower the budget deficit, say Cogan and Hubbard.
Source: John F. Cogan and R. Glenn Hubbard, "The Coming Tax Bomb," Wall Street Journal, April 8, 2008.
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