DC has never gotten this much in taxes — but Dems say it’s still not enough – New York Post | Vette Leader

President Biden and congressional Democrats are bragging that the (misleadingly named) Anti-Inflation Act will reduce deficits because his new taxes exceed his new spending.

But why does Congress and the President collect taxes in the first place?

That may sound like an odd question given America’s structural budget deficits. However, these deficits are entirely due to rising spending, not a drop in revenue.

This year, Washington will collect $4.8 trillion in tax revenue — $1 trillion more than in 2019. Over the past three years, annual tax revenue has increased by $7,000 per household, and individual income taxes have risen increased by 38%. (All of these numbers are adjusted for inflation.)

In fact, Washington has almost never been so swamped with taxes. Since 1960, federal tax revenues have generally remained near the economy’s average level of 17.4%. But after last year’s jump, revenue is expected to rise again this year to 19.6% of the economy — the second-highest level since World War II.

And over the next decade, revenue is expected to average 18.1% of the economy — just short of the highest 10-year period in American history. Even if all of the 2017 tax cuts are extended, revenue will still be well above typical levels.

Tax revenues are expected to rise again this year to 19.6% of the economy – the second highest level since World War II.
AFP via Getty Images

Today’s income taxes are already exceeding the levels that fueled tax revolts in the past. Over the past fifty years, the federal income tax has taken an average of 8% of the economy. The Reagan tax cuts were enacted in response to the increase in income tax revenues from 7.4% to 9.1% of the economy between 1976 and 1981. This year, Washington will collect a record 10.6% of the economy in income taxes, and likely 9.8% of that for the next decade. This is a nearly unprecedented level of federal tax.

Some may be surprised to learn that higher-income taxpayers still shoulder most of the tax burden. The top 20% of taxpayers will earn 60% of income this year but pay 76% of all federal taxes, including 93% of all income taxes.

The much maligned top 1% of income earners will earn 19% of income but fund 29% of all federal taxes, including 43% of all income taxes. Since 2016, annual capital gains tax revenue, which is disproportionately paid by high earners, has doubled.

Progressives still maintain that Americans are undertaxed because income tax rates of 91% in the 1950s are not coming back. Little do they know that the 91% tax rate was easily circumvented through tax deductions, income shifting and income capping. President Ronald Reagan told stories about leading actors in the 1950s who only made two films a year because a third film would be taxed at 91%. Economist Lawrence Lindsey noted that in 1960 only eight taxpayers in America actually paid the 91% tax rate.

Overall, Washington took just 7.2% of the economy in income taxes during the 1950s, which “taxes the rich” — the lowest in any post-World War II decade. And data from left-wing economist Gabriel Zucman concedes that the top 1% paid much lower effective income tax rates in the 1950s than in subsequent decades.

And yet the Anti-Inflation Act adds even more taxes and audits to pay for more expenses. The corporate tax would offset most of the corporate tax breaks introduced in 2017, while adding significant complexity to tax legislation.

It aims to prevent companies from avoiding taxes, but instead includes new carve-outs and exemptions, which in turn benefit companies that follow orders from Congress. And those taxes are passed on to the middle class through higher prices, lower wages, and lower retirement savings.

More importantly, the Inflation Reduction Act funds 87,000 new IRS employees. The IRS is in dire need of resources to improve taxpayer services and modernize its vastly outdated 1960s technology, which processes tax data slowly and incorrectly and delays tax refunds. Unfortunately, only 10% of the new funding will fund these investments, as the majority of the massive $80 billion in funds will be used for enforcement and testing instead.

Even John Koskinen, who headed the IRS under Presidents Barack Obama and Donald Trump, has claimed that providing $80 billion is three times what the IRS actually needs to restore sufficient audit capacity. He added, “I’m not sure you can use that much money efficiently… That’s a lot of money.”

The IRS doesn’t need tens of thousands of new agents just to audit America’s 800 billionaires, or even its millionaires. Despite promises to the contrary, audits are likely to increase across the board. Yes, tax enforcement matters, and the IRS must be able to adequately enforce the tax law. However, the IRS’s history of stubborn scrutiny of innocent taxpayers and its policy bias toward conservative organizations do not inspire confidence.

The rich still pay most of the taxes.
The top 20% of taxpayers will earn 60% of income this year but pay 76% of all federal taxes.
AFP via Getty Images

Perhaps instead of squeezing taxpayers with rising taxes, lawmakers could address the rising spending driver deficits. Even after the (largely justified) pandemic spending frenzy, Washington is projected to spend a peacetime record 23% of the economy over the next decade (and soar thereafter). Even with all the new tax revenue, this will create $16 trillion in new deficits. That, in turn, will drive the interest cost on the national debt to a record 3.3% of the economy, or more than the entire Department of Defense.

President Biden boasts that the Inflation Reduction Act will reduce deficits. But its modest deficit reduction would not start for several years and depends in part on new spending phasing out in three years (fat odds). Meanwhile, Congress also recently passed a semiconductor law that could cost $280 billion and a veterans law that could cost more than $600 billion later in the decade due to scoring gimmicks. In other words, Congress is asking for more taxes to fund more spending, even in times of mounting debt. Taxpayers better keep their wallets.

Brian Riedl is a Senior Fellow at the Manhattan Institute. Follow him on Twitter @Brian_Riedl.

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