"War Tax" Options

Revised Sept. 30 to reflect the formal publication of estimates from the Tax Policy Center.

With the budget deficit approaching 5 percent of GDP, and few signs of spending restraint in Congress, a temporary "war tax" is justified. The war tax could be proportional to income, or it could be tilted toward the highest-income taxpayers, who received the largest tax cuts in laws passed in 2001 and 2003.

Here are three options that would raise revenues of about $90 billion, according to new estimates from the non-partisan Tax Policy Center. $90 billion is the approximate annual cost of overseas anti-terrorist military and nation building activities.

1. Impose a 5.25% surtax on the income tax of all taxpayers, for 2003 and 2004: $89 billion (approximately 44 billion a year for two years).

2. Raise the top income tax rate from 35% to 37.5%, for 2004-2010: $93 billion (between $11 billion and $16 billion a year in those years)

3. Raise the top three income tax rates back to pre-2001 levels, for 2004-2006: $91 billion (approximately $30 billion a year for three years).

The economy is starting to recover, and is no longer in crisis. These tax increases would not thwart economic growth -- in fact, a sign that the government was serious about addressing the federal deficit would probably spark a favorable reaction in financial markets.

The "free lunch" era of budget surpluses is long gone. Now, we must either tighten our belts (via lower federal spending) or pay higher taxes to fund our priorities. Ever-expanding deficits would weaken the nation internally, when strength is needed.

Note: These estimates do not include behavioral feedbacks, such as tax avoidance activities. Official revenue estimates from the Congressional Joint Committee on Taxation might be lower for some of these options.

Link:
Urban-Brookings Tax Policy Center Options to Finance the Additional War Costs by Leonard E. Burman and Jeffrey Rohaly (September 29, 2003)

Posted by Jeff Lemieux at September 26, 2003 10:55 AM