NCPA - National Center for Policy Analysis

Higher Taxes Won't Reduce the Deficit

November 29, 2010

The draft recommendations of the president's commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21 percent of gross domestic product (GDP) from the historical norm of about 18.5 percent.  Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5 percent national sales tax on consumers, say Stephen Moore, the senior economics writer for the Wall Street Journal editorial, and Richard Vedder, a professor of economics at Ohio University.

The claim is that these added revenues will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade.  If history is any guide, however, that won't happen.  Instead, Congress will simply spend the money.

  • In the late 1980s, Richard Vedder and Lowell Gallaway coauthored a research paper that found that every new dollar of new taxes led to more than one dollar of new spending by Congress.
  • Subsequent revisions of the study over the next decade found similar results.
  • Updating the research, Moore and Vedder find that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending.

The only era in modern times that the budget has been in balance was in the late 1990s.  Taxes were not raised and the capital gains tax rate was cut in 1997.  The growth rate of federal spending was dramatically reduced from 1995-1999, and the economy roared.

Source: Stephen Moore and Richard Vedder, "Higher Taxes Won't Reduce the Deficit," Wall Street Journal, November 21, 2010.

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