Friday, April 15, 2011

Hiding Future Tax Hikes on Tax Day 2011

Heritage Foundation

Today, April 15, is typically Tax Day. Taxpayers would usually be furiously figuring out how much they owe Uncle Sam right about now. In case you didn’t know it, taxpayers this year get a three-day reprieve because of a holiday in Washington, D.C., commemorating President Abraham Lincoln’s emancipation of slaves in the District.

No matter what day Tax Day falls on in coming years, we’ll all be paying considerably higher taxes unless Washington’s reforms its reckless spending ways immediately. To make matters worse, Washington has been able to hide this enormous potential tax hike through all the deficit spending it is doing now.

In 2010, the federal government collected about $2.2 trillion in total tax revenue. Income taxes accounted for $900 billion of collections, or about 40 percent of all tax receipts. The federal government spent around $3.5 trillion, with the resulting deficit of $1.3 trillion made possible by borrowing. If Congress, rather than borrowing or cutting spending, raised income taxes by the $1.3 trillion necessary to pay for 2010 deficit spending, it would need to more than double income tax collections.

For a family of four earning $50,000 that takes the standard deduction, its current tax bill of $766 would increase by almost $4,000. A similar family of four that earned $75,000 a year would see its tax liability of $4,500 increase by over $9,000 a year. If the same family earned $100,000, it would pay more than $15,600 above the $8,800 it actually paid in 2010.

The top rate in this depressing scenario would be 85 percent! A top tax rate at that level would grind economic activity to a halt.

It is doubtful that the President and Congress would really raise rates to these levels and suffer the economic and political damage that such hikes would cause. The real danger is that, through continued trillion-dollar deficits, they would hide the true cost of government to the taxpayers.

On our current trajectory, interest on the debt from all the deficit spending we’re doing now—combined with the costs of Social Security, Medicare, and Medicaid—will consume all tax revenue by 2021. Raising taxes in the face of such a specter will not solve the problem, as entitlement and interest spending continue to balloon out of control. Tax rates would have to be raised perpetually to keep pace.

Don’t be fooled. Higher tax rates and the slower-growing economy that would come with them are not inevitable. But Congress and the President must cut spending, and they must do so soon—before interest expenses and entitlement spending take off.

It is time for Congress and the President to stop the current trajectory of massive spending and borrowing and be honest with the American people about the hidden deficit taxes that they are asking them to pay in the future. As millions of American taxpayers are finding out on Tax Day, taxes are already too high. Rather than pass on these hidden deficit taxes, it is time for Washington to get to work and cut spending.

Quick Hits

* Congress passed the federal budget compromise on Thursday. Now the debate turns to whether to raise the federal debt ceiling.
* An Arizona-style immigration law may be coming to Georgia. The state’s legislature passed a law on Thursday that would allow police to check the immigration status of criminal suspects.
* Oklahoma Gov. Mary Fallin yesterday rejected a $54 million health reform grant from the federal government as part of her effort to stop the implementation of Obamacare‘s health care exchange in her state.
* Food and fuel prices keep going up, leading to an increase in the cost of living in the United States for the ninth consecutive month.
* Join us today from 12-1 ET for our Lunch with Heritage chat on the Obama and Ryan budgets, featuring Alison Fraser, Director of the Roe Center for Economic Policy Studies at Heritage.
* Want to help stop spend and tax government? Then help Heritage with our Tax Day Money Bomb!

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