{"id":153,"date":"2025-06-17T11:05:26","date_gmt":"2025-06-17T15:05:26","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=153"},"modified":"2025-06-17T11:05:26","modified_gmt":"2025-06-17T15:05:26","slug":"tax-myths-and-fiscal-realities-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/17\/tax-myths-and-fiscal-realities-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"Tax Myths and Fiscal Realities \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"

Originally written on 1\/7\/2025<\/em><\/p>\n

Manhattan Institute Senior Fellow <\/span>Brian Riedl<\/span><\/a> recently wrote a <\/span>policy paper on ten tax myths<\/span><\/a>. Two of the myths he discussed are 1) that the United States government can increase tax revenue by cutting tax rates and 2) that increasing taxes on wealthy households would dramatically reduce the chronic federal budget deficits that currently stand at 6% of US gross Domestic Product (GDP). He notes that both of these claims are false.\u00a0<\/span>\u00a0<\/span><\/p>\n

Let’s examine the claim that cutting tax rates will increase revenue collection. For example, suppose Humbug County imposes a 1% tax on all real estate transactions and has $7 billion in real estate transactions, collecting $70 million in tax revenue. We can be pretty sure if it lowers its tax rate to 0.5%, more real estate transactions will occur. But for the lower tax rate to increase tax revenue, real estate transactions would have to more than double to $14 billion or more. While possible, it is a form of magical thinking to insist that lower tax rates will always raise tax revenue.\u00a0<\/span>\u00a0<\/span><\/p>\n

Riedl points out that the marginal personal income tax rate, where lowering the tax rate will yield more revenue, is estimated to be between 55% and 73%. He correctly notes this is \u201cwell above current rates\u201d for most everyone. So, while it is theoretically possible for tax cuts to increase federal revenue, it is delusional to think they are a viable deficit-busting strategy.\u00a0<\/span>\u00a0<\/span><\/p>\n

Second, Riedl writes that taxing the rich would not dramatically reduce the budget deficit. The tax rate on many of the highest-income earners is close to its maximum yield. The current top marginal federal income tax rate is 37%, plus 1.45-2.90% for the Medicare portion of the payroll tax, plus state and local income tax rates as <\/span>high as 14% in some<\/span><\/a> jurisdictions, making for an overall rate that is near 55% for some. The potential for additional revenue from taxing the high-income earners is limited. In a separate paper, Riedl points out that even under the most optimistic assumptions, tax-the-rich schemes could yield the <\/span>federal government only around 2% of GDP<\/span><\/a>. So, while it is theoretically possible for tax hikes on the wealthy to generate more tax revenue, it is delusional to think of it as a viable deficit-busting strategy.<\/span>\u00a0<\/span><\/p>\n

The reality of our national fiscal mess is troubling. But to paraphrase the great economist Thomas Sowell \u201creality is not optional.\u201d\u00a0<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Originally written on 1\/7\/2025 Manhattan Institute Senior Fellow Brian Riedl recently wrote a policy paper on ten tax myths. Two of the myths he discussed are 1) that the United States government can increase tax revenue by cutting tax rates and 2) that increasing taxes on wealthy households would dramatically reduce the chronic federal budget […]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[244],"tags":[1495,1098,1277,1491,1187,249,254,907,1492,1471,253,1493,1494,899],"class_list":["post-153","post","type-post","status-publish","format-standard","hentry","category-tax","tag-brian-riedl","tag-budget","tag-economic-policy","tag-federal-deficit","tag-fiscal-policy","tag-government-spending","tag-income-tax","tag-manhattan-institute","tag-revenue","tag-tax-myths","tag-tax-policy","tag-tax-rates","tag-taxing-the-rich","tag-thomas-sowell"],"yoast_head":"\nTax Myths and Fiscal Realities \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/17\/tax-myths-and-fiscal-realities-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Tax Myths and Fiscal Realities \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Originally written on 1\/7\/2025 Manhattan Institute Senior Fellow Brian Riedl recently wrote a policy paper on ten tax myths. 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