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How High Must Federal Tax Hikes Go?

In a new study released last week (Fiscal Fact 217, March 12, 2010), the Tax Foundation says “federal spending so high that even prohibitive income tax hikes would not balance budget. In the lede paragraph of the related press release, the Tax Foundation writes:

“Federal income tax rates would have to be more than doubled across the income spectrum if Congress were to close the deficit in fiscal year 2010, according to a new report from the nonpartisan Tax Foundation. Instead of taxing joint filers with rates ranging from 10 percent to 35 percent, tax rates would have to start at 24.3 percent and reach up to 84.9 percent.” (emphasis added)

William Ahern, the Tax Foundation’s director of policy and communications introduces the study by saying:

“As usual, the one number that everyone talks about is the budget deficit, and sober, nonpartisan fiscal experts are agog at the Administration's toleration of previously intolerable deficits. Everyone has a slightly different idea of how high the federal deficit can be in an ordinary year and still be "sustainable," but in recent testimony to Congress, Federal Reserve Chairman Bernanke said that the structural deficit was sustainable at 2.5 to 3 percent of GDP.

“At no point in the next ten years, according to the Obama Budget, will the deficit ever shrink to as little as 3 percent of GDP. According to the CBO, it will never even get as low as 4 percent. And the dire deficit predictions of reliable nonprofit groups like the Pew Trust and Peterson Foundation are even more alarming: the deficit won't even shrink to 5.5 percent of GDP in their analysis.

“'Mind boggling' is the term Martin Sullivan of Tax Analysts uses to describe the tax and spending changes that would have to occur just to get the deficit down to 3 percent of GDP.

"Our gridlocked, dysfunctional Congress simply cannot bring itself to absorb these types of painful shocks," says Sullivan. "Given these unprecedented pressures I believe that within the next decade there is more than a 50-50 chance there will be an upheaval either of the political system or the economy."

Add that warning to Moody’s warning earlier this week, as reported by the Christian Science Monitor, March 16 “that it would consider downgrading the triple-A rating for US Treasury Bonds if Washington continues to pile up record deficits,” and you have to wonder why Congressional approval ratings haven’t hit zero.

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