The last one isn’t something to get worked up about. There are lots of other interesting aspects to consider, but a couple more are worth mentioning. First, the number has the form 10% down at 3.9% for tax year 2015. So this year it is roughly the same value as 2013, at just over 9.6%. The annual growth rate over the past decade is less than 3%. And the growth rate over the decade for 2011 was less than 1%. So, if you take those numbers at face value, it’s likely going to produce a net negative result. This is because a tax cut in excess of 15% is supposed to produce a negative increase in revenue. That’s unfortunate, but let’s review the facts and figure out why this is so.
The tax cuts were the biggest issue, and I suspect this will be the focus of tomorrow’s update. The revenue numbers for 2011-12 are very encouraging, while the tax cuts were relatively small. But this number has been revised slightly upward a few times, leading to some confusion. Most of the confusion here is attributable to a slightly different way of projecting the growth rate. If you don’t need the whole text to understand this, do skip to the next chart:
But let’s take a deep breath and look at the numbers by tax category to get the whole message across.
A tax cut of $2,500 for everyone is a modest cut indeed. And given the high level of revenue growth in 2011 (over 3.5% in 2011) this is good revenue.
It’s a large offset for the spending cuts that were taken, because the tax rates were already quite high. If you had wanted to balance the budget, you would have chosen a lower rate of growth and not done away with the spending reductions. That would be politically untenable. Of course, a low rate of growth doesn’t mean it’s low. And there are some benefits of being high. First, income growth for low income families is significantly better than income growth for the wealthy, which has led to much greater gains from fiscal policy than has been commonly thought. Second, high low-income families are likely to continue to accumulate more wealth than high high-income families. This means that for an increase in tax income to make any kind of economic difference, you’d have to lower the tax rate on the highest income groups, not higher income households. Third, the gains to high-income households are likely to be higher than those in the middle, because they are concentrated in the business sector and because many of them would use higher tax revenues to offset their lost wages.
Not all gains for the top end of the system would disappear, of course. A couple of other things wouldn’t: the capital gains capital gains (because profits have moved more of their value towards capital rather than towards labor over the past couple of decades), the depreciation provision of various tax laws, the exclusion of dividend income, and the ability (as you can see by analyzing the data) for an offshore subsidiary to defer taxes for a company located in low-tax countries. But those losses are small compared with the big gains.
And by this , you could have a tax bill of zero, too. In a perfect world, everyone does what their taxes say, and has a flat flat tax. But the real world is more complex, and some people pay more than others. If the government were entirely free to tax you based on what you earn, you would have no incentive to work, because the tax advantage you have would be small compared with the tax disadvantage others would face. Those that are working will get the biggest tax deduction, and the other people that are working will lose. No matter how you cut the tax rate, a flat tax is still an income tax and is liable to generate a tax savings for all tax payers, including those that are not taking advantage of the benefit. But if you can make up a difference in other ways, you can’t use the benefits from the flat tax to offset the income losses those who are not investing will be going through, so you end up paying more. The “new” “terrification”
But the numbers above do show that the lower a tax rate, the stronger the tax cuts are.
Which raises a much bigger question how much higher can tax rates go? We have a way to determine that. If you start with today’s levels of debt, and you want to cut it by the same amount as current levels of debt, you might have to move the lower end of that curve up quite a bit, by some amount. After all, even if tax cuts were as large as the ones we just talked about, we’d already have reduced debt quite a bit.