President Obama and his team have proposed five goals for tax reform:
- Cut rates
- Cut inefficient and unfair tax breaks
- Cut the deficit by $1.5 trillion over 10 years
- Increase investment and growth in the United States
- Observe the “Buffett rule.”
I want to focus on #3, which translates as “Raise taxes by $1.5 trillion over 10 years.”
I did a little arithmetic and found:
- That’s about a 4 1/2% increase in total federal taxation over current policy.
- It’s about a 0.9 percentage point increase in the share of GDP above current policy.
- In addition to comparing the President’s goal to current policy, we can compare it to what we have done in the past. Since current policy allows taxes to grow relative to the economy over time (mostly because of “bracket creep,”), the President’s goal would bring taxes to about 20% of GDP by the end of the decade (2021).
- Compared to the historic average of 18.1% of GDP, the President’s goal for tax reform would add almost two full percentage points of GDP to federal tax collections. While it’s about a 4.5% increase in total federal taxation over current policy, it’s about a 9% increase in total federal taxes relative to historic averages.
- Don’t forget that even when taxes stay constant as a share of GDP, real (inflation-adjusted) tax collections by the federal government grow. If you hold taxes constant at their historic average share of the economy, the tax bite will grow in absolute terms while staying constant in relative terms.
That third Presidential tax reform goal is a doozy. I think a tax increase that large has a bigger negative economic impact than any good you might be able to do through making the tax code more efficient. The President’s goal of raising taxes undermines his goal of increasing investment and growth.