In a previous post, I spoke of the need to pay down at least some of the national debt to avoid paying junk-bond interest rates when we have to borrow to cover the Social Security payments to retired baby boomers- something that will occur no later than 20 years from now, and possibly within 15 years.
Someone brought to my attention a paper from the Tax Policy Center, a joint project by the Brookings Institute and the Urban Institute, entitled "Desperately Seeking Revenue" "This paper poses a simple question: could incremental reforms of the current tax system raise enough revenue to reduce the deficit to an average of 2 percent of GDP over the last five years of the budget window?" Before I continue, let me note that they aren't even trying to balance the budget, much less pay down the debt; the intent is only to reduce the amount of the annual deficit.
"Raise tax rates proportionately on single taxpayers with income over $200,000 and married couples filing jointly with income over $250,000. This policy would impose tax increases only on those taxpayers targeted by President Obama during the 2008 presidential election for tax increases under the expiration of the 2001 and 2003 tax cuts. We model a proportional increase in tax rates for taxpayers for whom adjusted gross income minus the standard deduction and one personal exemption (two exemptions for married couples) exceeds the relevant threshold. To meet our revenue target under current law, the top two tax rates would have to increase more than 40 percent, lifting the top rate to 56.4 percent. Under the administration baseline, the top rates would leap by 160 percent, lifting the top rate to nearly 91 percent. (my emphasis)
None of the options we have examined would provide a realistic approach to reducing the deficit over the coming decade, particularly if we impose our more stringent goal of cutting the deficit to just 2 percent of GDP. That goal would require tax increases that would cut after-tax income by an average of just over 2 percent, a politically difficult action. All of the changes we examine would be progressive, imposing greater costs on those higher up the income distribution; some of the options would be significantly more progressive than others. However, the most progressive— raising tax rates only for the wealthiest taxpayers—would require increasing the top tax rate to 56.4 percent under current law and to over 90 percent under the administration baseline. Because most of the additional tax burden would hit the top end of the income distribution, either situation would impose substantial efficiency costs on the economy, raise less revenue than generated in our simple simulations that ignore behavioral effects, and meet with great political opposition.
We recognize that raising the statutory corporate income tax rate could increase revenues but would be unlikely to contribute much to deficit reduction. Corporate income taxes make up only a small percentage of federal revenues— less than 9 percent of total revenue and less than one-fifth of individual income tax revenue over the ten year budget window, according to CBO projections. Whether reforming the corporate tax could do much to bring in needed funds is an open question. The U.S. statutory rate is high by international standards; Japan is the only OECD country with a higher combined federal-state statutory corporate tax rate. Raising the corporate rate significantly would likely have adverse effects on U.S. businesses and on foreign investment in the United States. We do not rule out corporate tax increases (through either statutory rate increases or base broadening), but we feel that raising significant revenues through the corporate tax is not a viable strategy.
If your eyes have glazed over by now, let me summarize: it is simply not possible to balance the budget by raising taxes. Even a serious attempt to do so would have such a negative impact on the economy as to actually reduce tax receipts. We cannot grow our way out of the deficit in time- not when the deficit alone is larger than the entire US budget when Bill Clinton took office.
Without a dramatic change in the way our government operates- and soon- the federal government will be forced to default in the next 20 years. Either default on loans, or default on the promises made in the Social Security, but one way or the other something will have to give.