40 Percent Tax Increase Needed To Close Deficit

Last week, we got a bit of good news that this year's deficit would only be around $1.6 trillion, as opposed to the earlier estimate of $1.8 trillion. Only $1.6 trillion? If that's good news, then you probably don't want to hear the bad news, but I'm going to tell you anyway: in its Mid-Session Review, the White House Office of Management and Budget today predicts a 10-year deficit projection of over $9 trillion. That's nearly $2 trillion more than the Congressional Budget Office recently estimated (opens .pdf). I thought it might be depressing fun to figure out how much you'd have to increase taxes to eliminate that $9 trillion.

First, let me say a few words about the $2 trillion disparity. I understand that projections like this are far more art than science. But how is the error magnitude plus or minus $2 trillion, or in this case around 28% of the CBO estimate? Such inaccuracy leads me to believe that these estimates are nearly worthless. Maybe, instead, when asked how much the 10-year deficit is going to be, they should just reply, "a lot."

But what if the OMB is right? $9 trillion is an awful lot of additional tax revenue. Such a number should warrant more than a shrug from Washington. This year's $1.6 trillion deficit is a little alarming, but only a little because it's obvious how much of that money is made up of bailouts and stimulus related to the financial crisis and deep recession. That's a legitimate excuse for a runaway deficit for this year. But how do we go from $1.6 trillion to $9 trillion over the next nine years, when things should be getting back to normal?

This kind of a path seems completely unsustainable. What if we wanted to raise taxes to eliminate that $9 trillion deficit? According to the Tax Policy Center, total tax receipts, including individual, corporate, excise, etc were only around $2.5 trillion in 2008. Next year, and probably in the few that follow, tax revenue should fall. But let's assume it would have been the same. In order to earn an additional $1 trillion in years two through ten, you would have to raise federal taxes by 40%. Again, that's across-the-board taxes. And remember: I'm being kind in assuming tax receipts wouldn't decrease from 2008.

Of course, there is another option that could soften the blow to taxpayers. Politicians in Washington could also (GASP!) cut spending. Sadly, given their lofty goals, there's little chance they have any significant cuts in mind for the future. And why should they -- it isn't their money they're spending.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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