Bringing the Federal Deficit Under Control: Bringing Future Deficits under Control - Ever-Rising Taxes?

October 17, 2011

Polls consistently reveal that the majority of the public is willing to increase the tax burden on all citizens to reduce the deficit. However, economist Bill Emmons explains that under current law, most households' income-tax burden would rise over time, and incentives to work, save and invest could be harmed.

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William Emmons: So that's what I really want to talk about now in part two is what are the possibilities? How would you try to—given that information, how would you go about sort of putting in place a strategy for attacking these problems? So on the one hand, you've got this horrible prospect of higher taxes—that's the extended baseline—and the other hand the exploding debts.

Okay. So let's look at revenues, and I'll talk more about this as we go. This is for the most recent fiscal year, all federal revenues broke out this way: 47 percent from the individual income tax, 35 percent from the social insurance taxes. And I put those together, lumped those together, and that's 82.4 percent because that's taxation based on income. So that shows you that our federal revenue process, or federal revenue generation system, is very heavily dependent on income taxes or income-type taxes. And you've probably heard economists say for many, many years, that's not the best way to raise revenues necessarily because we know it interferes with incentives to work, to save, to invest. And so this is just sort of an early sort of a pitch to get you starting to think about, well, what are other ways to raise revenues? And, in fact, remember the extended scenario is going to increase these income-based taxes as we go on.

Okay. Now it's time for you. We're into the realm of tough choices. Now, we can sit here and say Congress has no backbone, has no courage. Okay, what about us? Are we willing to raise taxes? Or actually, no, I'm sorry. This is what you already answered. I'm not going to give you a chance today on this one. We asked you, do you favor raising the tax burden on all citizens to help reduce the federal deficit? It doesn't say how much, but that every single person should play a role in increasing tax revenues. And 61 percent were in favor of that, 36 percent were opposed, so a majority but certainly not unanimous.

We also asked you, would you favor or oppose raising revenues by limiting tax deductions for households with incomes above $250,000? Again, 61 percent were in favor, 39 percent were opposed. I went back and checked. You can imagine, these sorts of questions are asked in opinion polls all the time. And I checked some of the results, and one very recent poll that I found: 64 percent believe that everyone's taxes should go up, everyone should make some contribution; 56 percent agreed that those households with incomes over $250,000 should be subject to maybe some additional tax revenue. So very close to the results of those of you who answered those questions.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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