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Growth Fact #2 of 10: Tax Revenue Gains Without Higher Taxes

March 9, 2012 by STRATeCOMM - We Got Web

The editors of the 4% Growth Project asked Bush Growth Fellow Ike Brannon to look into 10 things that would happen if the U.S. economy grew at 4% each year in real terms for 10 years. We will unveil one growth fact each week. To read all previous growth facts, click here. Growth Fact #2 of 10: If the economy grew at 4% per year, the government would collect more than $3 trillion in additional revenue over the coming decade,[i] matching the revenue that the Administration proposes to generate by raising income tax rates on the highest earners and allowing some business tax cuts to expire.


[i] In just three years of 4% annual growth, with no new taxes, the economy would generate 7.3% more than CBO’s current projections. In fact, a one-year, temporary increase in economic growth of one percentage point (to a 4% annual rate from the forecasted 3%) in 2012 alone would ultimately produce over $400 billion in additional revenue, approximately equal to the revenue that the Office of Management and Budget estimates would result from allowing the Bush income tax rate reductions to expire for small businesses and individuals in the top two tax rates. Furthermore, this projection of increased revenue understates potential tax revenue, because we know that sustained economic growth can produce progressively larger increases in tax revenue that invariably exceed the forecasts by CBO and OMB. For example, tax revenue grew 50% from 1996 to 2000 (a period with average annual GDP growth over 4%) and 44% from 2004 to 2007 (when GDP growth exceeded 3% annually), neither of which were predicted by CBO or OMB. See “Fiscal Year 2012 Analytical Perspectives, Budget of the United States Government,” Office of Management and Budget, Table 3-1. Note that the revenue gains rise substantially over the decade from the additional growth, so we cannot say $300 billion per year but $300 billion on average. The table is available at: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/spec.pdf. Look at Table 3.1, page 24, column 3. Two things to note: First, we are limiting our discussion of tax rate increases solely to the top 5% of earners (which is in the Administration’s proposed budget), but we are ignoring additional tax increases proposed on the top 5% of earners via the phase out of various deductions they have available. Second, to get the three years, we actually start with 2014 and not 2013. If there were a temporary increase in growth to 4% for just one year, it would create a higher base for future growth and thus impact revenue in subsequent years. The gains in 2013 from that one-year increase would be $292 billion, but it would have an increasing impact on revenue in future years. “Historical Budget Tables,” Congressional Budget Office, 2011.

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