Paying For Washington's Mistakes

• Ibd
• On 6:46 pm EST, Tuesday November 3, 2009

Taxation: Policymakers piled up a $1.4 trillion deficit for fiscal 2009. The figure is so high that if Congress were to use the income tax to balance the budget, rates would have to be nearly tripled.

The 2009 deficit was larger than the combined federal debt of the first two centuries of the country's existence. As staggering as that is to the mind, the 2010 deficit projects to be even bigger, roughly $1.5 trillion.

Unless Washington issues another foolish stimulus package or decides it will continue its ill-advised bailout business, the deficits should moderate somewhat. But the debt created by the deficits will still have to be paid. Ultimately, taxpayers will have to satisfy Washington's massive tab.

While it's unlikely policymakers would try to use income tax revenues -- which provide almost half of all federal revenues -- to close the deficits, it's instructive to see how high the rates would have to go to do that. Data from the Tax Foundation show this Congress and administration are poor stewards of other people's money and are failing their constitutional duty to protect the future of the republic.

The biggest hit in a world in which Washington bridged the budget gap with income tax revenues would be, naturally, on those who have the largest incomes.

The rates for joint filers earning at least $373,601 would have to be almost tripled, from 35% to 95.2%, to help close the 2010 deficit. (See table.) Though the brackets are at different income levels, the rate progressions are the same for single filers.

The rates would not be as punitive in 2012, when the deficit is smaller, but they would still be excessive. Those at the top of the income scale would be moved from 39.6%, the rate that will be reinstated after the Bush tax cuts expire, to 74.1%.

Those on the lowest end of the income scale would not fare much better. Their rates would have to jump from 10% to 27.2% to help eliminate the 2010 deficit, and from 10% to 18.7% to help close the 2012 deficit.

In terms of overall tax bills, the increases are just as alarming.

The average tax bill for a joint return in 2010 will be $7,169. If the deficit were to be closed, however, the federal government would have to have an average of $19,001 from each couple filing jointly (See table). For joint filers with taxable incomes from $50,000 to $75,000, the tax bill would triple, from $4,208 to $12,537.

Larger tax payments would be required in 2012, as well, though the increase wouldn't be as steep.

Instead of a near trebling, taxes would be just short of a doubling. Joint filers with $50,000 to $75,000 income, for instance, would move from paying $4,162 in taxes to $8,265.

Even the most far-left lawmaker in Washington understands that tripling -- or even doubling -- income tax rates would crush the economy. They know that high rates discourage, as William Ahern of the Tax Foundation has noted, "all manner of income-producing endeavors."

Yet there is an enduring cognitive dissonance at work in Washington.

The political class has tended to set tax rates as high as it possibly can, with little regard to how those rates affect the financial incentives that drive the economy and dictate federal revenues.

History suggests that Washington, as it's presently constituted, will be disposed toward raising tax rates rather than cutting spending in an attempt to cut the deficit. The question is: How high will the rates be set?

Our answer: Unless there are big changes in Washington next year, those rates will be too high.

Buzz up!