NCPA - National Center for Policy Analysis

OBAMA'S FAULTY TAX ARGUMENT

May 9, 2008

As the presidential campaign heats up, a key issue is whether to extend President Bush's 2001 and 2003 income tax cuts, which expire in 2011.  Opponents of the tax cuts, Barack Obama in particular, point to spending programs that could be financed by the extra revenues.  In reality, repealing the tax cuts would raise taxes far above Clinton-era levels, says Andrew Biggs, a resident scholar at the American Enterprise Institute.  Due to quirks in the tax code, average taxes would be almost 25 percent higher than during the 1990s.

Tax revenues would skyrocket if the tax cuts expire, due to bracket creep.  Average incomes are higher today than in the 1990s, but income-tax brackets aren't adjusted for the growth of earnings.  As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes.

For example:

  • If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8 percent of the total economy from 8.7 percent today -- an increase of 24 percent.
  • Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32 percent.

Income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates, says Biggs:

  • With the lower rates, total income-tax revenues will increase to 9.3 percent of gross domestic product (GDP) by 2018.
  • This level is 7 percent higher than today, and 13 percent above the 1957-2007 average.

So even if the tax cuts are made permanent, future Americans will pay a greater share of their incomes to the government than in the past.  But for some in Washington, that's not enough, says Biggs.

Source: Andrew G. Biggs, "Obama's Faulty Tax Argument," Wall Street Journal, May 9, 2008.

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