Tax Revenue Up Sharply, Without Tax Rate Increase

We’ve heard a lot about the deficit and the “cost” of continuing the current individual income tax rates (also known as the Bush tax rates) Vs the tax rate increase demanded by President Obama and Congressional Democrats.

But we heard silence from the media and the politicians last week after the Treasury Department released its report of revenue and spending for the first seven months of fiscal 2011.  Income tax revenue was up 26%, or $131 billion over 2010 even though those hated “Bush tax cuts” are still in effect. If the trend continues through the remainder of the fiscal year income tax payers will send $233 billion more to the IRS in 2011 than in 2010 without any increase in tax rates.

Tax revenue projections from Washington are usually designed to give you the impression that there will be no increase in revenue without a hike in tax rates.  Thus not raising tax rates will “cost” revenue.

In a report last fall the Congressional Research Service (CRS) asserted that the “cost” of extending the current tax rates for the “the rich” would be $252 billion over five years, or about $50.4 billion per year.  CRS did not explain how it arrived at this projection.

In December the Congressional Budget Office put the “cost” at $675 billion over ten years, or an average of $67.5 billion per year.  CBO didn’t explain its process either.

Do these projections mean revenue can’t go up unless tax rates go up?  CBO and CRS didn’t say.  But that’s what Obama wants you to believe.  But revenue has gone up without  a rate increase and has already blown past CBO and CRS projections with a rate increase.

In reality the strength of the economy is a much more significant driver of tax revenue than tax rates.  This chart tracks three decades of tax rate increases and decreases.

As the chart shows, income tax revenue was falling before, and then increased after the Reagan tax rate cuts of the 1980s.   Revenue was virtually unchanged after the first of two tax rate increases in the 90s.  After the second increase revenue went up for several years then declined three years in a row.  After the Bush tax cuts lowered the rates revenue went up dramatically, reaching an all time record high in 2008.  Revenue was down in 2009 and 2010 because of the deep recession.

The Bottom Line

Higher tax rates are not a guarantee of more tax revenue.  But higher tax rates do diminish economic growth.  The economy will improve more rapidly, and business can create more jobs, with lower tax rates than higher tax rates.  Tax revenue has already increased even in an anemic economic recovery.   Congress  should not subject us to the economic risk of a tax rate increase that might further weaken an already weak recovery, in the hope of a revenue increase that might not materialize.

The real cause of catastrophic deficits is relentless spending increases, not a lack of tax revenue.

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