July 19, 2010

So What Kind of Tax Hikes Are Needed to Erase a $1.5 Trillion Deficit?

by Scott A. Hodge

We are often asked what kind of tax increases would be needed to raise enough money to erase this year's estimated $1.5 trillion deficit. Earlier this year, we used our Federal Individual Income Tax Simulation Model to determine that—assuming no behavioral effects—we would have to increase every individual income tax rate by 242% (in other words the bottom rate would go from 10% to 24% and the top rate would have to go from 35% to 84%) to raise enough revenue to cover the deficit.

So for fun, we've been putting pencil to back of envelope to see how else lawmakers could raise revenues to erase the deficit using tax increases alone. The results (and these are very much back of the envelope) are truly frightening.

To erase this year's estimated $1.5 trillion deficit, we would need either to:

• Enact a 25% VAT (Greece is still a mess with a 19% VAT);

or,

• Take 130% of the taxable profits earned by U.S. companies this year (that's what you call net operating losses);

 or,

• Raise the top three tax brackets (28%, 33%, and 35%) to 100%. Actually, this would still not raise enough money to erase the deficit—of course, assuming all the wealthy taxpayers didn't flee to Switzerland.

 or,

•  Take 100% of the business income earned by individual taxpayers in 2008.

In other words, new taxes are not the solution to Washington's deficit problem. That is, unless we want to wreck our economy for decades to come.