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Clearing up a misconception: “tax hikes during a recession”?

Posted by Peter Orszag on February 26, 2009 at 07:29 PM EDT
One of the questions I received throughout the day today, as we released the Fiscal Year 2010 budget, is why we are proposing to raise taxes on high-income taxpayers during a recession.  And the answer is simple: we’re not.
 
First, the Recovery Act that was enacted earlier this month included $288 billion in tax reductions, as part of an overall effort to bolster the economy and help to fill in the "GDP gap" (the gap between how much the economy could produce and how much it is current producing).  During a recession, we’re cutting taxes.
 
Second, as the economy recovers, we will need to begin bringing down the budget deficit to avoid a fiscal crisis in the future.  So as we come out of the recession, and consistent with the President’s campaign proposals, the Budget combines spending reductions and revenue increases – with the revenue increases applying to high-income taxpayers (those with incomes of $250,000 or more) and corporations.   The roughly $2 trillion in deficit reduction that the Budget contains for the next decade is split evenly between spending reductions (of roughly $1 trillion) and revenue increases (of roughly $1 trillion). 
 
Let’s focus specifically on the revenue increases for high-income taxpayers.   The Budget proposes that the tax cuts currently enjoyed by those with incomes above $250,000 be allowed to expire at the beginning of 2011, at which point the economy should have recovered from the current downturn.  Again, the revenue increases for those with incomes of $250,000 or more a year would become effective January 1, 2011 – and not before.*
 
Finally, even after the economy recovers, the Budget proposes making the Making Work Pay tax credit permanent – which would provide a tax cut for 95 percent of working families.  And the Budget includes other tax cuts as well, such as expanding the Savers Credit.
 
The bottom line is that despite what some people are saying, no tax increases would take effect during the recession.  And even after the recession ends, 95 percent of working families would continue to enjoy tax cuts.
 
*For those who want to see that in the numbers, take a look at Table S-6 (pdf) on page 123 in the budget overview we just released (pdf).  The changes to the top marginal tax rates and other provisions affecting high-income taxpayers do not take effect until January 2011 – which is why there are little or no revenue effects until fiscal year 2011.  (The small changes in revenue from capital gains and dividends in 2010 reflect modest assumed shifts in behavior in anticipation of the tax changes taking effect at the beginning of the following year.)
 
 
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