NCPA - National Center for Policy Analysis


June 30, 2006

The idea of accepting tax increases in exchange for equal decreases in entitlement expenditures seems to be gaining ground in Washington.  This idea may look promising on paper, but in reality it would prove quite costly, say Ernest Christian and Gary Robbins of the Center for Strategic Tax Reform, a Washington-based think tank.

It has long been known among analysts in and out of government that tax increases adversely affect economic growth; that $1 of additional tax, therefore, reduces pretax and after-tax incomes; and that, when correctly accounted for, the total is substantially greater than $1.  For instance:

  • A new study by the National Bureau of Economic Research at Harvard University confirms that the total cost of raising $1 of additional tax is about $2.50.
  • Christian and Robbins' own model produces almost identical results ($1 of visible tax plus $1.57 of "lost" wages, salaries and other income).
  • Recent calculations by the Congressional Budget Office produce similar results in the case of an across-the-board tax increase on both labor income and capital. A tax increase solely on capital -- such as upping the tax rate on dividends -- costs about $4.30 per $1 of revenue raised.

Reducing spending, the authors contend, is a better solution to help fix the government's fiscal situation.  In addition, cutting spending is in most cases conducive to greater economic growth and higher incomes. 

Source: Ernest S. Christian, Gary A. Robbins, "A Dubious Deal For Reduction In Entitlements," Investor's Business Daily, June 30, 2006


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