March 21, 2008

March 21, 2008 | Commentary on Taxes

Congress' $3,000 per Household Tax Increase

Washington has no budget problems that higher taxes cannot solve. So seems the message from Congress.

The House- and Senate-passed budgets would raise taxes on every American taxpayer by an average of $3,000 per household. But don't expect Congress to share in the sacrifice: The budget would hike discretionary spending by 8 percent, and not cut a single government program.

First, the tax increase. The largest four-year revenue surge in 40 years has pushed tax revenues to 18.8 percent of GDP -- well above the historical average. Yet the House-passed budget tied itself to a revenue baseline that assumes the 2001 and 2003 tax cuts will expire, and that the Alternative Minimum Tax (AMT) will catch another 20 million Americans. That baseline also assumes the child tax credit would be halved, the marriage penalty reimposed, and the 10 percent tax bracket raised to 15 percent. Investment taxes would likely rise, and the 55 percent "death tax" would be reinstated as well. (The Senate budget would prevent some of the lower-income tax hikes.)

Although those tax increases are assumed in the congressional baseline, lawmakers could choose to raise other taxes instead. But regardless of where it comes from, the budgets assume tax rates will rise well above current levels. Taxpayers will still pay $4 trillion more, regardless of which pocket lawmakers pick. The average per-household cost would rise from $187 next year, to $3,237 in 2012, and to $4,716 by 2018.

That may not even be all. The budgets also include dozens of "reserve funds" which effectively give lawmakers a blank check to hike taxes even more to finance additional spending.

While there is never a good time to raise taxes, pledging $4 trillion in tax increases during a time of economic uncertainty is especially worrisome. Raising tax rates on every taxpayer and business would reduce incentives to work, save and invest, and therefore significantly reduce the economy's long-term capacity to grow and raise living standards. The same Congress that enacted a one-time $1,200 per household tax rebate (to be distributed in May) in hopes of helping the economy would now turn around and raise taxes by an average of $3,000 per household annually. Even though the budget delays most of the tax increases until 2011, businesses and investors may begin delaying long-term investment plans in anticipation of higher investment taxes and the resulting slower economic growth.

Rather than pay down debt, much of these new taxes would finance ever-expanding government. Washington already spends $25,000 per household, and the House and Senate budgets would boost the discretionary portion of the budget by 8 percent - on top of its inflation-adjusted 45 percent increase since 2001.

Regrettably, Congress did not propose any significant offsets for this new spending. Nor does it propose eliminating a single wasteful federal program -- not even unnecessary programs such as the Advanced Technology Program, which spends much of its $70 million budget subsidizing Fortune 500 companies.

In failing to offer spending reductions, congressional budget writers ignored $55 billion in annual program overpayments, $60 billion for corporate welfare, and $123 billion for programs that government auditors  find have no evidence of success.. No real reforms, just more tax dollars thrown at the same old programs.

Even a Senate proposal to forgo earmarks for one year until the system can be cleaned up was overwhelmingly defeated, 29-71.

Worst of all, Congress' budget ignores the greatest economic challenge of our era: the costs of providing Social Security, Medicare and Medicaid benefits to 77 million retiring baby boomers. In the absence of reform, paying all the currently-promised benefits would eventually require either permanently raising taxes by the current equivalent of $12,072 per household or eliminating all other government programs.

The problem is well-known. Medicare's public trustees recently issued a financial warning, and Moody's has threatened to downgrade Washington's bond rating until entitlements are reformed. Yet Congress steadfastly refuses to make the tough decisions necessary to save the next generations from crippling debt. And every year of delay raises the eventual cost of reform.

Congress has voted to raise taxes for every American taxpayer, while offering no spending sacrifices themselves. President Bush should keep his veto pen handy.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Taxes

First appeared in Human Events