What If We Taxed Our Way Out of This?

It's one of those "what-if" scenarios that will probably never come to pass, but the Congressional Budget Office released a paper yesterday analyzing what would happen if the government tried to solve its long-term fiscal problem just by raising taxes. Nothing else: no budget cuts, no tinkering with entitlement formulas, no selling off assets. Just raising taxes. Not likely, you might say, but this kind of exercise can help sharpen everyone's perception of how big the problem is.

So what's the bottom line? Well, in 2005 a single person at the median income level ($27,000 per year) paid about 24 percent of his or her income in federal taxes -- that's personal income and other payroll taxes. Depending on the assumptions you make about the economy and how tax increases would be set up, by 2050 that same person would be paying 30 to 32 percent of their income in taxes, according to the CBO. For a married couple with two kids, the amount paid in taxes would go from 20 percent in 2005 to anywhere between 25.5 percent and 37.6 percent in 2050, depending on the scenario.

The CBO takes pains to point out that these are rough projections, based on a lot of assumptions, and that tax increases can have more or less impact on the economy depending on how they're crafted. But the agency also points out something else:

The difference between acting to address projected deficits (by either reducing
spending or raising revenues) and failing to do so is generally much larger
than the implications of taking one approach to reducing the deficit compared
with another.

In other words, doing something about the long-term problem, whatever it is, is better than doing nothing.