Economics, Taxes and Spending

If you want record income tax revenue, extend the Bush tax cuts

12.19.12 Biggs Income Tax Chart

My colleague James Pethokoukis points out that the CBO projects that tax revenues will rise by over $2 trillion in the next decade simply due to economic growth. Today, revenues are unusually low because the economy is weak, but as growth recovers taxes will return to normal levels.

But if you go out longer, it’s actually better—or worse—than that. The chart above, taken from the CBO’s 2010 Long Term Budget Outlook, projects personal income tax revenues relative to GDP under three different scenarios: let all the Bush tax cuts expire; extend the Bush tax cuts with relief from the Alternative Minimum Tax; and extend the Bush Tax Cuts without AMT relief. The blue dashed line represents the historical average level of around 8.1% of GDP. (The federal government also collects payroll taxes, corporate taxes and so forth, but the policy debate is principally over personal income taxes.)

The CBO projections show that even if we make all the Bush tax cuts permanent and limit the effects of the AMT, income tax revenues will rise to near-record levels over the next two decades. By 2030, income tax revenues relative to GDP will be around 25% higher than the historical average. Rising taxes are driven principally by so-called “real bracket creep,” in which incomes rise faster than the inflation-indexing of the income tax brackets and so average tax rates rise. Switching to the chained CPI would only exacerbate this trend.

So if you want record income taxes, all you really need to do is extend the Bush tax cuts and wait. The problem is that, for many, record levels of income tax revenues aren’t enough.

4 thoughts on “If you want record income tax revenue, extend the Bush tax cuts

  1. That’s fine, but it’s more important to (at least appear to) punish The Rich. We need to deflect responsibility for low economic growth.

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