From the No Sh*t Sherlock Department

The Congressional Budget Office is a non-partisan organisation, one that Congress (and others) can turn to to get an impartial reading of what various policies would cost. So they get asked:

Dear Congressman: Under current law, rising costs for health care and the aging of the population will cause federal spending on Medicare, Medicaid, and Social Security to rise substantially as a share of the economy. If tax revenues as a share of gross domestic product (GDP) remain at current levels, that additional spending will eventually cause future budget deficits to become unsustainable. To prevent those deficits from growing to levels that could impose substantial costs on the economy, the choices are limited: Revenues must rise as a share of GDP, projected spending must fall, or both. In response to your letter of May 15, 2008, the Congressional Budget Office (CBO) has prepared the attached analysis of the potential economic effects of (1) allowing federal debt to climb as projected under the alternative fiscal scenario presented in CBO’s The Long-Term Budget Outlook (December 2007), (2) slowing the growth of deficits and then eliminating them over the next several decades, and (3) using higher income tax rates alone to finance the increases in spending projected under the alternative fiscal scenario. In keeping with CBO’s mandate to provide objective, impartial analysis, this report makes no policy recommendations.

Greg Mankiw extracts the important part of the report:

Under current law, rising costs for health care and the aging of the population will cause federal spending on Medicare, Medicaid, and Social Security to rise substantially as a share of the economy....In response to your letter of May 15, 2008, the Congressional Budget Office (CBO) has prepared the attached analysis of the potential economic effects of...using higher income tax rates alone to finance the increases in spending....

With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent.

Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion.

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