NCPA - National Center for Policy Analysis

Where Is the Money Going to Come From?

February 24, 2011

If Washington is going to need new tax revenues to bring the deficit under control, where is the cash going to come from?  It appears that while corporations and nearly all individuals and families would avoid any tax hit at all, a handful of high-income households would get socked with major increases.  These tax hikes would be so big, in fact, that top-bracket taxpayers might end up paying a rate of 67 percent on ordinary income and nearly 50 percent on capital gains, says Howard Gleckman, a resident fellow at the Urban Institute.

  • Since proposing his 2012 budget, President Obama has laid out three goals: He wants to reform the corporate income tax, but in a way that raises no more money than the current code.
  • He's repeated his long-standing vow to never raise taxes on individuals making $200,000 or less (or couples up to $250,000).
  • Thus, he'd exempt 96.5 percent of households from any tax hikes.
  • And despite those self-imposed constraints, he also wants to dramatically reduce the long-term deficit.
  • As a result, a relative handful of individuals and families (fewer than 6 million) would foot the entire revenue bill for deficit reduction.

How big would these tax hikes have to be?  Let's assume the president's goal is fiscal balance.  And let's say he would get there with the same formula as his fiscal commission -- two-thirds of deficit reduction from spending cuts and one-third from taxes.  To reach balance in 2020, Obama would have to reduce the deficit by $735 billion in that year alone.  Using the two-thirds/one-third formula, the tax hike would be about $245 billion, says Gleckman.

Source: Howard Gleckman, "Where Will New Revenues for Deficit Reduction Come From?" Tax Policy Center, February 17, 2011.

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