The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.
William Ahern is director of policy and communications at the Tax Foundation.
Can Income Tax Hikes Close the Deficit?
By William Ahern
For all but three years of the past 40, the federal government has run a deficit, and at the most
basic level, the reason is simple. In their desire to be re-elected, congressmen are afraid not to
spend more and more, and they’re equally afraid to give voters the bill for those services,
even though that bill must inevitably be paid.
During the fiscal year that’s just beginning, fiscal year 2010, the federal government plans to
spend $3.8 trillion dollars, the largest annual expenditure ever. On the revenue side, taxes will
bring in about $2.3 trillion, so the federal government is creating a shortfall of approximately
$1.5 trillion. That projected deficit will vary as the months pass, but it may well end up being
even higher than the record-setting deficit in 2009 of $1.4 trillion. Those huge amounts
translate into a federal government that will spend $33,000 on each household but that will
raise only $19,000.
Although President Obama and the Congress do plan to raise taxes, which will cut into the
deficit, they also have new spending plans, leaving the budget with historically huge deficits
throughout the next decade. Those deficits will be financed by selling U.S. Treasury bonds to
people all over the world and paying them back with interest in years to come. But instead of
borrowing, could a congress willing to bring taxpayers the full bill for this year’s spending
erase the deficit by raising taxes this year?
Using the Tax Foundation’s Microsimulation Model, we can project how much revenue a
broad-based increase in federal income tax rates would generate. However, when the rates
necessary are spelled out, it becomes apparent that deficits this large simply cannot be closed
with higher federal income tax rates. This year and for several years to come, even if
congressmen were willing to present the full