Arnold Kling  

Biggs on Bracket Creep

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Andrew Biggs writes,


If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.

Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average. Thus even with the tax cuts, revenues will increase by more than enough to fix Social Security.

What is truly frightening is that even these tax increases are not sufficient to pay for Medicare.


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CATEGORIES: Tax Reform



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/828
The author at The American Mind in a related article titled Economics Links–05.09.08 writes:
    Andrew Biggs clues us in on a dirty little Washington secret: tax revenues will go up even if President Bush’s tax cuts are made permanent. And I’m not speaking in supply-side mumbo-jumbo. Arnold Kling notes, “What is truly frighteni... [Tracked on May 9, 2008 3:55 PM]
COMMENTS (6 to date)
Matt writes:

I would look for reversibility.

Does inflation adjust to maximize market equilibrium between taxpayers and government services?

The Fed, unable to work with government disequilibrium, finds a compromise.

Tim Worstall writes:

I don't know if you guys use the same phrase but we Brits call that "fiscal drag". Over the long term the effects are horrendous.
Decades ago income tax started at around average incomes. Now, someone part time on the minimum wage (20 hours a week) pays income tax. All because the personal allowance has been upgraded by inflation (CPI for us) rather than earnings growth.

Brandon writes:

Tim:

If only the top 50%-ish paid for income tax (yes, I'm conflating median and mean here..), then an insane majority of the American public would be paying little to no taxes.

What incentive would there be for that majority to cull government spending or demand efficiency from government programs? (Not that much of that goes on right now...)

This is the main reason I support a flat tax: if you make the middle class actually pay taxes, we won't have so many.

GU writes:

Brandon, we're already at that point in the U.S.

The Top 40% of earners shoulder 99% of the federal tax burden. The middle quintile takes on 1% of the federal tax burden, and bottom 40% receive more than they pay/or pay nothing. This is at the aggregate level, individual results can differ, but it holds generally.
http://online.wsj.com/article/SB117668220910270761.html?mod=opinion_main_commentaries

Floccina writes:

What is truly frightening is that even these tax increases are not sufficient to pay for Medicare.

Being some what influenced by Robin Hanson’s take on Medical care I have to disagree with the above statement. Medicare can spend enormous amounts of money or cut spending. It will spend as much as it is allowed to spend. At some point voters will get the message and cap the spending and IMO very few people will be hurt by the cap.

BTW If you have some time watch the PBS Frontline special “Sick Around the World” (http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/). Evidently countries use various different methods to limit Healthcare spending none that I saw made economic or scientific sense but they are effective at cutting spending.

The most interesting to me was Japan where they evidently use price controls so that Doctors and hospital etc. do not make much money, but they still seem to have plenty of doctors, enough that people in Japan see doctors more than we do. I am sure that this affects the quality of candidates that go to medical school in Japan, but if you think about it engineers probably affect health more that doctors do so better to have your smarter would be doctors become scientists and engineers than doctors. Economically the same affect might be achieved through reducing licensing requirements.

In most of the countries profiled the countries paid for things that we are almost sure do not work like acupuncture.

http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/

They should have called the show “Weird Around the World”.

ZC writes:

"but if you think about it engineers probably affect health more that doctors do"

Really? How, exactly, does that make sense? First off, if you limit pay, you will kill your future pool of doctors. Doctors are plenty intelligent and hard working, and those students could just as well make it in business or law or whatever other profession you deem worthy of pay (since apparenlty it can be dictates as you see fit). Also, having a less skilled pool of physicians will serve to increase costs. More needless tests to chase diagnosis that don't make sense. More complications. Etc.

Stupid baseless statement. Go ahead. Reduce licensing requirements. You can be the first to let the 'cut rate neurosurgeon' operate on your brain.

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