With entitlement spending set to surge when the Baby Boomers
start to retire, recent talk on Capitol Hill of fiscal discipline
is welcome. But to some lawmakers, that means raising taxes rather
than tackling the core problem of entitlement spending. Raising
taxes would be folly. Any tax increase would be a real and
unacceptable threat to America's prosperity.
The nation's fiscal problems are not the result of inadequate
taxation. Federal tax revenues are surging into the Treasury, and
the tax burden is already scheduled to increase under current law.
With no changes to current tax policies, the tax burden on the
American people will reach a record high in 2026 and continue to
rise thereafter. Rather than add new taxes, Congress should focus
on curbing the projected growth of taxes and crafting a serious
strategy to reform and constrain entitlements.
For now, Congress should:
- Reject tax rate increases and impose no new taxes;
- Reject any increase of the Social Security wage cap;
- Make the Bush tax cuts permanent; and
- Fix and then repeal the Alternative Minimum Tax (AMT).
The Current-Law Crisis
America faces an entitlement spending tsunami. According to the
Congressional Budget Office (CBO), spending on the big three
entitlements-Medicare, Medicaid, and Social Security-is projected
to rise from just over 8 percent of GDP today to almost 19 percent
in 2050, when today's college graduates are nearing retirement.
Meanwhile, federal taxes as a proportion of GDP are also
scheduled to rise sharply under current law-from today's 18.4
percent, which is just above the post-World War II average, to
almost 24 percent by 2050-well above the highest levels the nation
has ever experienced. Contrary to liberal rhetoric, even making the
Bush tax cuts permanent would ease this surging tax burden only
marginally-by less than 1 percentage point. This effect would
likely be even smaller if dynamic scoring were used to calculate
the impact these higher taxes would have on the economy, rather
than just their bookkeeping "cost."
Reject New Taxes
Any tax increase on top of this rising burden would put America
well on the way to European-level taxes, causing European-style
economic stagnation, slow income growth, and unemployment. Even
France has begun to recognize how damaging such levels are, and
French President Jacques Chirac has proposed to cut France's
corporate income tax rate from 33 percent to 20 percent. Congress
must ensure that the U.S. does not take even one step down the road
to higher taxes and a slower economy. Instead, it should face up to
the challenge of entitlement spending.
Reject Raising the Social Security
Congressional Democrats, unfortunately, have offered a rash of
schemes to respond to the entitlement explosion by raising taxes
even faster than they are scheduled to grow. One is to increase the
Social Security wage cap, which limits the amount of an
individual's income that is subject to the Social Security payroll
tax. This change would not address Social Security's financial
imbalance; it would only postpone huge operating deficits by a few
years. More worrisome, this step would impose a large marginal tax
rate increase on 3 million entrepreneurs and small business owners.
This will cost jobs, decrease personal savings, and undermine
American competitiveness. Raising taxes is an unacceptable solution
to a spending problem.
Make the Bush Tax Cuts Permanent
The Bush tax cuts, especially the 2003 tax rate reductions, have
been a critical part of the recent economic expansion. Letting them
expire would constitute a huge increase in marginal tax rates and
would dramatically boost the double taxation of saving and
investment. This risky step also would speed the increase in the
tax burden that is built into existing law.
Letting the cuts expire would be counterproductive. Washington
is now awash in tax revenues. Federal tax revenues have surged to
record levels in recent years, thanks in large part to the growth
in capital gains and dividends receipts after the tax rate
reductions were implemented. Job growth has also boosted revenues,
underscoring the fact that lower tax rates help economic
Under current law, these beneficial rate reductions will sunset
over the next four years, leading to rate increases and putting
America on an accelerated path to record tax burdens. That must not
happen. As a first installment, the tax rate changes must be made
permanent. Congress should then begin to reform the tax code to
reduce rates and the total tax burden. Such steps toward
fundamental tax reform would lead to faster economic growth.
End the AMT
The AMT was originally intended to ensure that a tiny number of
millionaires could not escape taxation by sheltering their income
through credits, exemptions, and deductions. But subsequent
expansions of the law, combined with the lack of indexing of the
AMT, have resulted in millions of Americans-especially those with
children, heavy state and local taxes, or small businesses-being
snared into the AMT's higher tax rates. The number of tax filers
facing the AMT will rise from 3.5 million in 2006 to as many as
23.4 million in 2007. Indeed, the AMT is the main culprit behind
the aggregate tax burden's projected to climb to 24 percent of
Congress needs to take two steps to address this pernicious tax.
First, it should immediately index the tax's thresholds to prevent
any more Americans from being sucked into the AMT. Second, Congress
should enact legislation to repeal the AMT-without offsetting the
repeal with new taxes elsewhere and so retaining the escalation in
total tax burden.
America has prospered in part because Americans enjoy low taxes
and low spending. But under current law, spending and taxes are
both set to increase to record and unsustainable levels,
threatening America's prosperity and the freedom of American
families to control the uses of their income. Congress's spending
agenda should be to craft serious reforms to get entitlements under
control. And the tax agenda for the new Congress should be the same
as it would be for any Congress: no new taxes and decisive steps to
reverse the increase in the overall tax burden that is already
scheduled to occur.
M. Butler, Ph.D., is Vice President for Domestic and
Economic Policy Studies, and Alison
Acosta Fraser is Director of the Thomas A. Roe Institute for
Economic Policy Studies, at The Heritage Foundation.