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Q&A on Taxes, Debt Reduction

August 23, 2012
Senator Chuck Grassley , Traer Star-Clipper

Q: Why not raise taxes on the high income to pay down the deficit and debt?

A: Professor Richard Vedder of Ohio University has studied tax increases and spending for more than two decades. His research has found that over the entire post World War II era through 2009, each dollar of new tax revenue has been associated with $1.17 in new spending. A researcher for the National Bureau of Economic Research also has studied this question and found that when it comes to fiscal adjustments, "those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over Gross Domestic Product ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions." The evidence demonstrates that reducing government spending, not raising taxes, is the key to deficit reduction.

Q: Doesn't raising taxes on couples earning more than $250,000 a year protect the middle class from higher taxes?

A: This year, President Obama renewed his four-year old campaign for tax increases. The President says the tax hike he wants would be on the wealthy only and that the middle class would be safeguarded. The reality is that his proposal fails to extend countless expiring tax incentives for middle class Americans, including classroom teachers and college students. It doesn't do anything to stop the AMT from hitting middle-class families. It wouldn't stop tax increases in the 2010 health care law. It also hurts job creation by raising taxes on small businesses, where 70 percent of new jobs are created, a bad idea with 12.7 million Americans unemployed.

Q: What's the impact on the federal budget?

A: A symbolic tax increase on individuals earning more than $200,000 a year and couples with more than $250,000 in income a year won't even fund the government for a week. More significantly, the President's budget proposal this year increased taxes and spent more on government programs rather than dedicating any tax increase to reducing deficits and debt. According to the nonpartisan Congressional Budget Office, President Obama's plan would have increased the national debt $10 trillion over the next ten years. More taxes and spending will not reduce federal deficits or drive down federal debt. That's common sense. The history of tax rates teaches a lesson, too. Since World War II, revenue to the federal Treasury as a percentage of the gross domestic product has averaged right around 18 percent. This has remained true whether the top marginal rate is 93 percent, 70 percent, 50 percent, 28 percent or the current 35 percent marginal rate. What this means is that the government can't tax its way to surpluses. Substantial adjustments must be made on the spending side of the ledger to bring it in line with revenues.

 
 

 

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