2011 Tax Increases = -6% Drop in GDP?
I read an interesting article by John Mauldin today, in which he mentions that the 2011 tax increases (mainly letting the Bush tax cuts expire) will amount to about an extra 2% increase in tax revenue in relation to GDP.
Taxes may be going up by as much as 2% of GDP in 2011, when you include state and local increases. This could be as much as a 6% drag on GDP over the next three years (probably somewhat front-loaded). So, let’s add it up. We will likely see a reduction in government spending (from all levels) over the next few years, a really nasty set of tax increases, which will hit small businessmen the hardest, and continued high unemployment, and all of it coming in a weakening economy by the end of the year.
Yikes, that means the economy would have to grow at a rate of 6% or more otherwise to avoid a recession, not something that is done easily in a deleveraging climate. I decided to check on the claim of a tax increase of 2% of GDP. Not an easy thing to do because there are so many numbers flying around everywhere and decisions can change at the last second.
The US economy’s GDP is currently around $14.2 trillion. Thank you Google for making that simple. At 2%, we need tax increases of about $290 billion.
Trying to find straight answers about the exact number the government expects to extract from raising the top rates to 35/39.6%, the dividend tax, and the slew of state tax increases (mainly from battered Blue states such as Oregon).
The CBO made life a little easier by simplifying things. Here are their estimates tax revenue between 2009-2013:
So that’s about a $495 billion jump in tax revenues (for the federal government only, remember those state tax increases too). Part of this is due to rising GDP, but the CBO seems to expect tax revenue of increases in the rest of normal years of about $250-$300 billion. Seems like the CBO is expecting an extra $200-$250 billion or so of tax revenue due to a raise in rates, and when combined with state tax increases, makes the 2% case fairly justified. Considering we’ve already seen the rise in government spending (which is why our deficit is about 10% of GDP this year, I don’t think Congress is going to be countering these extra taxes with more spending (the taxes are meant to bring down the deficit).
It seems a deflationary double-dip recession brought about by tax increases due to an earlier wave of government deficit spending, similar to what happened in 1937-1938, is certainly on the table.