Can Income Tax Rate Hikes Close the Deficit? (interesting article)

In summary, the conversation discusses the need for increased taxation in order to address the growing federal deficit. The author, William Ahern, notes that US tax rates are historically low and that there is a large portion of the population who currently do not pay federal income taxes. However, the conversation also brings up the fact that these individuals still pay other federal taxes, such as payroll taxes, and may not be "freeloading" as some may suggest. Overall, the conversation highlights the complex nature of taxation and the need for careful consideration when proposing solutions for addressing the deficit.
  • #141
Al68 said:
<snip>
1901-1915 (15 years) ___________________________ 630
1916-1940 (25 years) __________________________ 4,015
...
1990_____________________________________1,031,972
2000_____________________________________2,025,198

These numbers are not adjusted for inflation, but since inflation was only a big factor after we went off the gold standard, and clearly cannot account but for a fraction of the growth seen above, these numbers are still a good indication of the stark difference between the early history of the U.S. and the last century.
The calculator I found here says that the inflation from the early 1914 to now is over 2,000%. Let's call the revenue for 1914 a round $1000 (millions assumed throughout). Scaled for inflation, that's about $200,000. That's for a 1914 population of about 100 mill, compared to today's pop of about 300. Also, the workforce participation has increased significantly, as a fraction of population, due to the addition of women to the labor force. These two effects contribute a multiplier of about 4. That makes the effective 1914 revenue about $800,000, which is about 2.5 times smaller than today's value.

If I haven't made any big mistakes, that is clearly smaller than today's value, and assuming we didn't transition across a Laffer optimum, implies that effective tax rates were similarly smaller than today's. I don't think I'd characterize it as a 'stark difference' though.
 
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  • #142
Gokul43201 said:
The calculator I found here says that the inflation from the early 1914 to now is over 2,000%. Let's call the revenue for 1914 a round $1000 (millions assumed throughout). Scaled for inflation, that's about $200,000. That's for a 1914 population of about 100 mill, compared to today's pop of about 300. Also, the workforce participation has increased significantly, as a fraction of population, due to the addition of women to the labor force. These two effects contribute a multiplier of about 4. That makes the effective 1914 revenue about $800,000, which is about 2.5 times smaller than today's value.

If I haven't made any big mistakes, that is clearly smaller than today's value, and assuming we didn't transition across a Laffer optimum, implies that effective tax rates were similarly smaller than today's. I don't think I'd characterize it as a 'stark difference' though.
That all sounds about right, and thanks for the legwork. Government (and tax rates) certainly has grown considerably since 1914. But the "stark" difference I was referring to is between the first 125 years (roughly) and the last century. It was roughly those first 125 years that the U.S. went from nothing to "the greatest nation in history", and after that that other nations started catching up.

A quick glance at those numbers indicates a very stark difference indeed, especially considering that inflation was a much, much smaller factor. here shows that from 1800 to 1900, the total inflation was only about 100% instead of over 2000% for the last hundred years.

And "stark" is a huge understatement if we combine those periods, and consider the growth of government (and taxes) since the beginning.
 
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<h2>1. How does increasing income tax rates affect the deficit?</h2><p>Increasing income tax rates can potentially close the deficit by generating more revenue for the government. However, it is not a guaranteed solution as it also depends on other factors such as economic growth and government spending.</p><h2>2. Are there any potential drawbacks to increasing income tax rates?</h2><p>Yes, there are potential drawbacks to increasing income tax rates. Higher tax rates can discourage individuals and businesses from investing and spending, which can slow down economic growth. It can also lead to tax avoidance and evasion, reducing the expected revenue from the tax hike.</p><h2>3. How do income tax rates affect different income groups?</h2><p>Income tax rates can affect different income groups differently. Generally, higher income groups will be more affected by tax rate hikes as they have a higher taxable income. However, the impact also depends on the specific tax brackets and deductions applied to each income group.</p><h2>4. Are there any alternative solutions to closing the deficit besides increasing income tax rates?</h2><p>Yes, there are alternative solutions to closing the deficit besides increasing income tax rates. These include reducing government spending, implementing new taxes or closing tax loopholes, and promoting economic growth through policies that encourage investment and job creation.</p><h2>5. How do other countries handle their deficits and income tax rates?</h2><p>Different countries handle their deficits and income tax rates differently. Some countries rely heavily on income tax to fund their government, while others have a more diverse tax system. Some countries also have higher income tax rates compared to others. It is important to consider each country's unique economic and political situation when comparing their approaches to addressing deficits and income tax rates.</p>

1. How does increasing income tax rates affect the deficit?

Increasing income tax rates can potentially close the deficit by generating more revenue for the government. However, it is not a guaranteed solution as it also depends on other factors such as economic growth and government spending.

2. Are there any potential drawbacks to increasing income tax rates?

Yes, there are potential drawbacks to increasing income tax rates. Higher tax rates can discourage individuals and businesses from investing and spending, which can slow down economic growth. It can also lead to tax avoidance and evasion, reducing the expected revenue from the tax hike.

3. How do income tax rates affect different income groups?

Income tax rates can affect different income groups differently. Generally, higher income groups will be more affected by tax rate hikes as they have a higher taxable income. However, the impact also depends on the specific tax brackets and deductions applied to each income group.

4. Are there any alternative solutions to closing the deficit besides increasing income tax rates?

Yes, there are alternative solutions to closing the deficit besides increasing income tax rates. These include reducing government spending, implementing new taxes or closing tax loopholes, and promoting economic growth through policies that encourage investment and job creation.

5. How do other countries handle their deficits and income tax rates?

Different countries handle their deficits and income tax rates differently. Some countries rely heavily on income tax to fund their government, while others have a more diverse tax system. Some countries also have higher income tax rates compared to others. It is important to consider each country's unique economic and political situation when comparing their approaches to addressing deficits and income tax rates.

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