Should We Raise Taxes on the Middle Class?

Should We Raise Taxes on the Middle Class? We Already Are

By Andrew G. Biggs

Taxes are already rising to record levels, with or without legislative changes.

I have a lot of respect for House Majority Leader Steny Hoyer, who stands practically alone as a leading Democrat willing to give fiscal responsibility the time of day. Several months ago, I took part in a forum with Hoyer and other speakers from across the political spectrum, and I think he deserves great credit for speaking up on fiscal issues when every other Democratic leader—be it President Obama, House Speaker Nancy Pelosi, or Senate Majority Leader Harry Reid—is nowhere to be seen.

And yet, Hoyer’s call for what the TaxVox blog calls “a ‘serious discussion’ about whether to permanently extend the Bush tax cuts for those making less than $250,000 as President Obama wants” deserves greater attention.

Here’s why: taxes are already rising to record levels, with or without legislative changes. It’s not clear why they should rise further, as Hoyer urges.

If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress.

As I argued in the Wall Street Journal in 2008, the income tax code is inadequately indexed for the growth of incomes. The income tax brackets—the dollar amounts that designate the tax rates that apply to an individual’s income—are indexed only for inflation, while incomes tend to rise about 1 percent faster than inflation each year. The result is that a greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.

The effects of this are larger than you’d think. According to Congressional Budget Office (CBO) data, individual income tax receipts averaged 8.15 percent of Gross Domestic Product from 1953 through 2008. Due to the recession, this year they’re projected to equal around 8 percent of GDP.

But by 2020, income tax receipts are projected to rise to 9.5 percent of GDP, even if all of President Bush’s tax cuts are made permanent. By 2030, income tax receipts will rise to 10 percent of GDP, 22 percent higher than the historical level.

A greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.

Put another way, the CBO reports that in 2007 the average household paid 9.3 percent of its income in taxes. Obviously, this average masks a tremendous variation between income levels, and households pay payroll and other taxes as well. Nevertheless, we can roughly estimate that the average household income tax rate will rise to 10.4 percent by 2020 and 10.9 percent by 2030. Average marginal rates—the rate paid on an additional dollar of earnings—will also rise.

In other words, we don’t have to talk about tax increases, we’ve already legislated them. If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress. But such a proposal would be helpful, since it would focus the public’s mind on the size and responsibility of government relative to individuals.

Yet, over time taxes will rise through simple inertia. And if the Bush tax cuts for high earners are allowed to expire, then tax revenues will rise further.

By 2030, income tax receipts will rise to 10 percent of GDP, 22 percent higher than the historical level.

If someone recommended that income tax revenues needed to increase by 15 or 20 percent over the next several decades in order to partially accommodate rising entitlement costs, I’d probably be willing to go along. I wouldn’t be happy with it, but the fiscal pressures gathering are so large that it’s hard to think of closing that gap without some additional revenues, particularly given the conflicted nature of most Americans on these questions.

But it’s a different thing to say that we need additional tax increases on top of a built-in increase of more than 20 percent. Notwithstanding the economic costs of higher taxes, there is the simple question of how much the government is truly justified in taking from its citizens. I already think we’re on the high end of that range.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008 to 2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.