Taxing Our Way to Prosperity?


An important part of the "fiscal responsiblity" that President Obama is pushing has to do with raising the amount of taxes paid as a percentage of GDP. As the Wash Post puts it:

Tax collections under the [budget] plan would rise from about 16 percent of the economy this year to 19 percent in 2013….

Senior White House adviser David Axelrod said in an interview that the proposals reflect the ideas that won the election.

"This is consistent with what the president talked about throughout the campaign," and "restores some balance to the tax code in a way that protects the middle class," Axelrod said. "Most Americans will come out very well here."

More here. Perhaps most Americans will come out very well in the sense that they will pay the same or less in direct taxes. After all, Obama's income tax increases supposedly only kick in on households making $250,000 or more a year.

However, most Americans will not come out very well if the following is true:

Tax changes that are made…to reduce an inherited budget deficit, in contrast, are undertaken for reasons essentially unrelated to other factors influencing output. Thus, examining the behavior of output following these relatively exogenous tax changes is likely to provide more reliable estimates of the output effects of tax changes. The results of this more reliable test indicate that tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

Who says that? None other than the chair of Obama's Council of Economic Advisers, Christina Romer, in research conducted with David Romer in 2007.

What else is in the budget? Read this for answers.