21 Apr 2011

Return to Clinton Era Tax Levels

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Moderate Megan McArdle warns that accepting the liberal Kevin Drum‘s prescription to return to Clinton era tax rates would not come even close to paying for the federal deficit but would have very serious economic consequences.

Saying “all we have to do is go back to the tax rates under Clinton” is effectively saying “all we need is another asset price bubble that funnels a huge amount of money into the pockets of the rich”. This seems neither particularly feasible, nor desirable.

If we pick, somewhat optimistically, the mean tax take of the Clinton years, that means that we need a tax hike of 5-6% of GDP. And not over 20-30 years. …

A tax hike of 5-6% of GDP doesn’t sound like much. But that’s a big tax hike if your baseline is 19%–it means that everyone’s taxes go up by about a third. If the equilibrium tax revenue at Clinton rates is more like 18-18.5% of GDP, then obviously, they have to go up even higher, from a lower baseline. If you try to concentrate the pain on the wealthy or corporations, it’s an even bigger whack. Meanwhile, state and local taxes will be going up too; they have many of the same pension and entitlement problems that the federal government does.

These aren’t little adjustments. They’re huge changes in the overall tax burden, and they will have big effects on peoples lives, and the economy.

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One Feedback on "Return to Clinton Era Tax Levels"

Harl Delos

It’s not taxation that’s a burden on the economy, so much as it is spending.

After we deduct the goods and services that the government commandeers, we have a given amount of goods and services. If we tax less, there are more dollars out there chasing those goods and services, and inflation taxes the economy more. If we tax more, there are fewer dollars out there, and inflation taxes the economy less.

Total government (federal, state & local) spending, as a percentage of GDP, rose during the Dubya administration from about 32% to about 39%. That’s not as bad as it looks, because Medicare drug benefits were a big chunk of the increase, and that wasn’t really much of an increase in spending, but rather spending re-categorized as government spending instead of private spending.

ERTA dropped the top tax rate from 70% to 50%, and there economy barely took notice. TRA in 1986 raised the bottom rate from 11% to 15% and dropped the top rate to 35%, and nobody saw any really big changes then, either.

The sky isn’t going to fall in if we go back to the tax rates of the 1990s.



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