Thanks to the revenue leakages in our notoriously inefficient tax system, the “fiscal cliff’s” increase in tax revenues from wealthy taxpayers will be far less than meets the eye. A so-called “static” analysis of the tax rate increase indicates the deal’s higher marginal 39.5 percent tax on ordinary income for wealthy taxpayers would net $370 billion in new revenue over 10 years (a static analysis assumes the tax increase will not change taxpayers’ behavior).
That would hardly dent the country’s $13 trillion, ten-year budget deficit projected by the Congressional Budget Office. On that score, $370 billion is not a lot of money and, in fact, the new revenue will actually fall far short of that amount. Wealthy taxpayers will apply what Harvard professor Martin Feldstein characterizes as “inefficiencies” in our tax system. Among others, you can count on the wealthy to cut back on taxable income-earning activities, substitute untaxed fringe benefits (better health insurance, a company car) for taxable income, change the form of their business organizations, change charitable giving, spend freely on professional tax accounting assistance and more.
Until the United States government fixes its dysfunctional federal tax system, tax rate increases will trigger loopholes and arbitrary deductions to create huge revenue leakage.
Donald Grant Simonson, Ph.D.
Finance professor emeritus
Anderson Schools, UNM