The most fundamental reason why taxes should be raised is that the U.S. government needs more money.
Currently, the U.S. government runs a persistently large budget deficit, and its debt has exploded to 99 percent of GDP.
According to the research of professors Carmen Reinhart and Kenneth Rogoff, who studied 44 countries over a period of up to 200 years, economic growth tends to slow once debt exceeds 90 percent of GDP.
Reinhart and Rogoff's study aside, common sense suggests that the budget deficit cannot persist forever. Eventually, a government must default -- either by not paying the nominal value of debt or by printing money.
Both options would likely have destructive consequences.
U.S. debt has exploded because of both spending increases and tax revenue decreases.
Data from Office of Management and Budget, chart made using Microsoft Excel
Government spending has increased faster than tax revenues have decreased. Therefore, one can certainly argue that spending is the bigger issue.
However, it is also undeniable that taxes are relatively low compared to past decades.
For example, both tax rates and tax receipts as a percentage of GDP are low compared to the post-World War II norm.
Data from Tax Policy Center, chart made using Microsoft Excel
Many experts, including billionaire investor Warren Buffett, therefore conclude that the U.S. government must both decrease spending and raise taxes.
Some mistakenly assume that economic growth automatically reduces budget deficits.
However, the U.S. economy has steadily grown in the post WWII era, yet the debt-to-GDP ratio has surged since the 1981 low of 32 percent. Since 1981, incidentally, tax rates have also plunged.
Data from www.usgovernmentdebt.us and Tax Policy Center, chart made using Microsoft Excel
Opponents of raising taxes claim that doing so hurts economic growth. Their argument is not without merit, as several academics studies do back their general assertion.
However, there is also no denying that the economy boomed in the 1960s, when the top marginal income tax rate was as high as 91 percent.
Therefore, even if higher tax rates do stunt economic growth, tax policy is not the most important driver of the economy. Moreover, history demonstrates that the U.S. economy can certainly handle higher tax rates than the 2012 levels. The two decades following World War II also arguably demonstrate that high tax rates and economic growth can successfully reduce debt levels.
In a CNBC interview on Monday, Buffett raised two additional arguments for raising taxes, especially on the ultra-rich:
- Last year, corporate profits as a percentage of GDP were over 10 percent, the highest in 50 years, while corporate taxes as a percentage of GDP were just 1.2 percent, which was close to the lowest level in the postwar era. The U.S. corporate tax rate effectively averaged around 12 percent, which is far below the figure in most industrialized countries.
- In 1992, the top 400 largest incomes in the U.S. were a combined $19 billion. By 2008, they had grown to $108 billion. Their tax rate, meanwhile, dropped from 26.3 percent in 1992 to 18.1 percent in 2008. A similar statistic is that 16 of the 400 largest incomes paid taxes below 15 percent in 1992. By 2008, a whopping 131 of the largest 400 incomes paid taxes below 15 percent.
"I don't like any tax ... but the reality is that we are going to have to raise [government revenues equivalent to] 18.5 or 19 percent of GDP. ... I certainly think that the people who are very wealthy should do more than the people like my cleaning lady," said Buffett.
RESOURCE IBTimes
