A Citizen's Guide to Deficits and Debt: The Politics of Taxing, Spending, and Borrowing by William E. Hudson

Author:William E. Hudson [Hudson, William E.]
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781136160066
Google: TdaTAgAAQBAJ
Goodreads: 20535520
Publisher: Routledge
Published: 2013-12-15T00:00:00+00:00

Conclusion

Although many Americans believe that federal taxes are too high, the evidence shows that the reality of the tax burden does not support this belief. Beginning with the Reagan supply-side tax cuts, income tax rates have taken a downward trajectory for the past thirty years, and this lighter income tax burden has largely offset higher payroll taxes for Social Security and Medicare. Americans, on average, pay a slightly lower effective tax rate than they did in 1979. The wealthy, thanks to much lower top marginal tax rates and lower taxes on investment income, and the poor, thanks to more generous tax credits, have benefitted most from lighter federal taxation. Even with these changes, the U.S. federal tax system remains progressive although slightly less so than in the 1960s. And, despite a slightly lower tax burden, the system has generated a constant level of revenue, around 18 percent of GDP, for the entire period. This revenue level, however, has not been sufficient, except for a few years in the late 1990s, to pay for federal spending commitments. The result has been relatively high structural deficits going back to the 1980s. Clearly, too little federal tax revenue is a component of our deficit and debt problem.

The 2008 recession produced huge deficits partly because of the interaction of low tax rates enacted during the Bush administration and the drop in household income. The historically low level of federal revenue as percent of GDP (15 percent) is an artifact of the recession and will rise as the economy recovers. Even if tax revenues return to their average level of the past few decades, will that be enough to fund future spending commitments? The answer most certainly is no. The tax system that has failed to generate sufficient revenue to avoid structural deficits for most of the past three decades clearly will be inadequate to meet the growing spending promised in existing laws. Entitlement reform may revise those promises somewhat and lower the upward spending trajectory, but the reality of an aging population suggests that higher future federal spending levels are inevitable. If an explosion of national debt is to be avoided, more federal tax revenue will have to be raised. Whether that comes from merely higher rates in the current system or more comprehensive tax reform will be the real choice facing policy makers.

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