The Reality of Raising Taxes at the Top, Part 6: How to Raise Taxes at the Top Consistent with Economic Growth?
This blog series and our new report have shown that tax increases on high-income people of the magnitude under consideration would not change their behavior in ways that would hurt economic growth. Moreover, the revenues from tax increases can reduce the deficit or fund investments that support growth. So how should policymakers consider raising taxes at the top?
One way is to scale back inefficient tax expenditures. Tax expenditures, such as the home-mortgage interest deduction, are essentially spending subsidies delivered through the tax code. Any serious attempt to reform tax expenditures would affect high-income taxpayers, because they benefit more from the tax breaks than low- and moderate-income taxpayers do.
Broadening the tax base by reforming tax expenditures could increase the efficiency of the tax code by reducing opportunities for tax avoidance. For that reason, we should aim for the broadest base and lowest rate possible to raise the revenues we need. That doesn’t mean, however, that marginal rate increases for high-income taxpayers should be off the table, nor that the revenues generated by base broadening should be used to finance tax rate cuts. In fact, the evidence should point policymakers to consider both base broadening and tax rate increases, because:
- There’s a limit to how much tax expenditure reform is possible. Many of the tax breaks meet important needs or are politically difficult to reform.
- Base broadening reduces opportunities for tax avoidance. That, in turn, reduces the economic cost of additional tax rate increases.
- The economic cost of unsustainable government debt is much higher than the cost of modestly raising taxes at the top to help reduce the deficit.
- Fairness matters. Without rate increases, low- and moderate-income people would likely bear a greater share of the deficit reduction burden through deeper cuts to programs or tax expenditures that benefit them.
Put simply, tax increases on high-income taxpayers of the sort under consideration would not hinder — and could even bolster — economic growth. With this in mind, policymakers should aim for a balanced deficit reduction package that shares the load through a mix of tax increases and spending cuts.