Tax Increases Diminish Economic Opportunities

As Ronald Reagan might say upon hearing Hillary Clinton’s latest tax proposal, “there she goes again.”

Secretary Clinton wants to impose a 4 percent “fair share surcharge” on people earning more than $5 million annually in order to get the “wealthy and the corporations to pay their fair share.”

While fairness may be a relative term, facts are absolute.

And, the facts are clear. The wealthiest Americans pay the vast majority of income taxes and, on average, pay a higher average tax rate than any other income group. Furthermore, government expenditures continue to grow faster than the overall economy, indicating that the federal government continues to absorb ever-more private resources.

Perhaps most importantly, tax rate increases do not solve what is perhaps the largest economic problem facing the country — stagnating incomes for far too many families. In fact, tax increases make the situation worse.

According to the Tax Foundation, and based on the latest IRS individual income tax data, the top 1 percent of taxpayers earned 18.7 percent of all income (technically adjusted gross income or AGI), but paid 35.1 percent of all income taxes. On average, their federal income tax rate was 23.5 percent.

The average tax rate on the top 1 percent of income earners was 7 times greater than the average federal income tax rate for the bottom 50 percent of taxpayers, who paid 2.9 percent of all income taxes and, on average, faced an income tax rate of 3.1 percent. In fact, no matter how you categorize the income groups, taxpayers who earned more faced a higher average tax rate than taxpayers who earned less.

Secretary Clinton claims that tax increases are necessary to help the economy. Allegedly, spending the new tax revenues on infrastructure projects, education programs, and government-sponsored research and development ventures will help accelerate economic growth.

But, total federal government outlays are already above their historical share of the economy. Since 1981, total federal government outlays have averaged around 20 percent of the economy. By the end of President Bill Clinton’s term, total outlays had fallen and were only a bit above 17 percent of the economy.

This spending restraint did not last. As of 2015, total outlays have grown substantially and are now estimated to be around 21 percent of the economy — above the historical average.

Therefore, relative to its traditional size, it is clear that the federal government is already spending more than enough money. If Secretary Clinton believes other programs need to be funded, the problem is not that the federal government is spending too few resources. The problem is too little budget prioritization.

Perhaps worst of all, Mrs. Clinton’s proposed tax increases will worsen the economic problems facing far too many families. Adjusted for inflation, the income for the poorest 20 percent of households grew 1.1 percent a year between 1981 and 1999. This growth was experienced across all income groups — with the income of the top 20 percent of households growing 2.4 percent a year.

Since the turn of the century average household income for all families, adjusted for inflation, has stagnated. The poorest households have suffered the most, experiencing the largest declines in their real incomes. Clearly, reigniting broad-based income growth is one of the most important economic policy priorities for the next Administration.

Tax increases, such as Secretary Clinton’s proposal, worsen the income stagnation problem by reducing overall economic growth. For example, in a 2010 paper published in theAmerican Economic Review that was co-authored by President Obama’s former Chair of the Council of Economic Advisors, the authors found that “tax increases are highly contractionary.” Therefore, the likely outcome from the proposed 4 percent tax surcharge is reduced economic activity that will worsen the income stagnation problem.

Raising tax rates based on false premises would increase economic disincentives and worsen the growing economic insecurity problem. As the experience of the 1980s and 1990s illustrated, the most effective way to address the income stagnation problem is through comprehensive economic reforms that improve incentives and empower families to work, save, and invest.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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