Federal policymakers have recently floated a number of proposals to levy new taxes or to increase existing taxes.  These include:

• higher individual income tax rates,
• higher tax rates on capital gains and dividends,
• an income tax surcharge on upper income households,
• removal of the earnings cap on payroll taxes for OASDI benefits (i.e., Social Security pensions),
• eliminating the tax treatment of carried interests as capital gains,
• higher motor vehicle fuel taxes, and
• a new tax on the carbon content of energy.

However, these tax proposals are not paired with significant spending reductions.  Instead, many are combined with plans for new spending.  It is doubtful whether these proposals should be considered as deficit reduction measures

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In a 1987 Republican Joint Economic Committee study, Vedder, Gallaway and Frenze argued that the econometric evidence for the 1947-86 period suggested that every $1.00 of new federal tax and non-tax revenues was associated with $1.58 in new federal spending, implying that budget deficits rose with increases in the aggregate federal tax rate.2  A 1991 follow-up study reaches similar conclusions. 3  This study confirms many of the same results.

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The overall burden of taxation is much larger than the tax receipts that government collects each year because taxes distort the behavior of individuals and firms.  These distortions reduce potential output or economic welfare.  Economists refer to this reduction as the excess burden or deadweight loss of taxation, which is usually expressed as a percent of tax collections either on average or at the margin (the last dollar of tax collected). 

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Economic theory gives policymakers solid support for resisting tax increases and preferring spending reductions as a method of reducing the federal deficit.

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When thinking about government spending, often people only consider its benefits. But government spending has costs, too, because the resources government uses have to come from somewhere and could be put to other uses. Research indicates that when these factors are taken into account, it turns out that the cost of raising an additional $1 in taxes is not $1, but closer to $1.40. On the other hand, reducing government spending by $1 can benefit the economy by $1.40, leading to higher economic growth.

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There are compelling arguments for promoting moderation in the growth of governmental expenditures over time. A potentially politically viable policy for promoting economic growth would be to allow government expenditures to rise modestly over time, but by less than the growth rate in GDP, leading in time to some reduction in governmental expenditures as a percent of GDP. In effect, this has been the experience of the past several years. In addition, the benefits of moderating inflation observed in recent times are arguments for the Federal Reserve continuing to follow its stated objective of promoting price stability. Since taxes tend to automatically rise over time as a percent of GDP (in large part, because of the progressive nature of the income tax), and since tax reduction also tends to reduce the propensity of policy-makers to increase expenditure, a very strong case can be made for a tax cut. Current softness in the economy further supports the case for tax reduction.

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The current tax system is counterproductive and biased against saving and investment. The tax system imposes large losses on the economy that reduce the economic welfare of households and businesses. The current level of taxation imposes additional costs of about 40 cents at the margin for each dollar collected in revenue. A reduction in the burden imposed by the tax system would make a significant improvement in the economic well-being of American households. Furthermore, if this surplus revenue is not returned to the taxpayers, it appears likely that most of it will be absorbed in federal spending increases.

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As discussion continues over the federal government's budget for fiscal year 2000, a large number of political leaders are calling for some form of tax relief. Three factors are contributing to this push for tax reduction: first, the federal budget is in surplus for the first time in decades. It is financially possible to have tax reduction without incurring the political problems associated with budget deficits and/or forced reductions in federal expenditure. Second, federal tax revenues are at a historic high in relation to the nation's output, and many taxpayers feel the federal government is imposing an increasingly unreasonable burden on them, thereby increasing the political appeal of a tax cut. Some areas of taxation - e.g., the taxation of savings and capital - are particularly high and burdensome. Third, some advocates of tax reduction feel that if federal revenues are not soon reduced, that political forces will operate to increase spending, crowding out private sector activity. History suggests that this possibility is indeed very real.

This study argues that tax reduction would have very significant positive welfare effects on the American economy. Based on previous research by a large number of scholars, it is reasonable to foresee the equivalent of tens of billions of dollars of new output being created with a significant reduction in taxes. While it is true that from a Keynesian, demand-side perspective, the case for a tax reduction is rather weak, there are compelling arguments that suggest that lowering taxes would promote economic welfare. A tax reduction that approximates the magnitude of the 1998 or projected 1999 budget surplus would provide benefits to Americans measured in tens of billions of dollars annually.

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Recent projections of Federal budget surpluses have stimulated discussion about the role of tax policy in the current macroeconomic policy mix. This paper first highlights several key premises underlying pro-growth tax policy:

• The current tax structure imposes an excessive burden or welfare cost on the economy
• Tax rate changes can impact economic incentives in a wide range of ways
• Tax policy should focus on long-term economic growth rather than on short-term aggregate spending or business cycle stabilization
• Tax rates should be distinguished from tax revenues
• Tax relief can work to constrain government spending growth in a number of ways

Given these premises, the paper highlights a number of considerations supporting tax relief policies at the present time

• Marginal tax rates have increased for many taxpayers in recent years
• Federal tax revenue as a percent of GDP has increased to historic highs in recent years
• Tax rate reduction could contribute to sustaining essential economic growth
• Tax relief could help constrain current pressure for more government spending
• Tax rate reduction can help to restore a more rational tax policy
• Proportional income tax relief to those paying income taxes is fair and equitable

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Government serves many useful functions, including some economic ones. The findings here support the view that the growth of government in newly emerging nations and economies tends to increase output. Presumably this reflects the reduction in transactions' costs and the improved environment for investment associated with a rule of law and enforceable property rights. At the same time, in modern times relative American federal government spending has expanded rapidly, reflecting sharp increases in transfer payments. The evidence suggests that large transfer payments in particular have negative consequences for growth. The results for the federal government are confirmed for state and local governments and several other countries. The findings suggest that a federal budget strategy of constraining spending growth below output growth, with particular attention paid to constraining transfer payments, would have positive effects on economic growth.

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This paper shows that excessively large government has reduced economic growth. These findings present a compelling case that rather than devising new programs to spend any surplus that may emerge from the current economic expansion, Congress should develop a long--range strategy to reduce the size of government so we will be able to achieve a more rapid rate of economic growth in the future.

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Dr. Lawrence B. Lindsey emphasizes that tax rates tending toward maximization of Federal revenue are not the same as those conducive to economic well-being and economic growth.

His review of the key concept of Excess Burden (the net loss in economic well-being to the taxpayer from a tax) demonstrates that even when higher tax rates increase government revenue, economic offsets include reduced taxpayer well being, a shrinking tax base, and a lower economic output.

Lindsey strongly urges the Congress to recognize this explicit trade off, to change its analytic approach to taxation by taking into account the degree of burden imposed at the margin to collect an additional dollar of Federal revenue, and to consider the cost of maintaining today's high rate structure. This approach, he concludes, would allow Congress to do the best job it can at maximizing economic welfare. Please Note: This report was presented as written testimony to the Joint Economic Committee on March 13, 1997.

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This report examines how tax reduction improves incentives to work, save, and invest and increases long-term productivity and economic growth. The 1960s and 1980s are cited to illustrate the positive effects of tax cuts. Keynesian and free-market perspectives are compared.

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This report examines the problem of "rent seeking" and how such activity rewards special interests while hurting the American economy. It explains how special interests seek what economists call "rents" that favor their industry. The report makes the case that to avoid the problem of rent seeking and to help restore long-term economic growth, the size of government should be reduced.

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This study focuses on the effects of excessive federal taxes and spending on the American family, including its effects on family structure, family income, children, and social institutions supporting family life. It provides evidence that the shift in resources towards the Federal government has simply gone too far and that federal restraint in taxes and spending would provide more economic and family income growth over the long run.NOTE: This paper is the fifth in a series of studies on the impact of the welfare state. The other four papers are entitled The Impact of the Welfare State on the American Economy (December 1995), The Impact of the Welfare State on Workers (March 1996), The Impact of the Welfare State on America's Children (May 1996), and The Impact of the Welfare State on Small Business and the American Entrepreneur (JEC Study -- July 1996).

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This JEC study shows how the size of the welfare state is burdening America's small businesses and entrepreneurs through mounds of taxation and red tape. In addition, the costs of complying with government regulation tends to impose disproportionate costs on small business relative to big business. Furthermore, this study finds that a $100 billion reduction in federal spending growth would boost economic growth by $35-38 billion annually.

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This is the third in a series of studies examining how excessive federal spending affects different aspects of the economy. Its primary conclusion is that for each $100 billion of non-defense federal spending restraint, 3 million children would be moved out of poverty.

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This is the second in a series of studies examining how excessive federal spending affects different aspects of the economy. Among its conclusions is that for each one dollar of federal spending restraint, worker wages and benefits would increase by 26 cents.

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This report expands and builds upon the recent Lowell Gallaway and Richard Vedder study on the optimal size of the federal government, commissioned by the JEC, as well as recent in-house JEC works. It underscores the important point that the way to get our economy going is to reduce federal spending and cut taxes.

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This JEC study by two distinguished economists, Professors Lowell Gallaway and Richard Vedder of Ohio University, examines the impact of the level of federal spending on the American economy. Their analysis shows that every $100 billion reduction in federal spending would produce $138 billion in additional private sector economic growth. Furthermore, their findings indicate that the optimal level of federal spending is approximately 17.6 percent of gross domestic product (GDP). This study also contains a brief history of the growth in the size of the federal government.

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This JEC report addresses the use of very misleading wage data released by the Department of Labor under then-Secretary Robert Reich and intended to show that real wages have fallen over a 12-month period as a result of Republican policies. A review of the Labor Department figures shows that the original data from the Bureau of Labor Statistics were manipulated in a manner plainly contrary to accepted standards.

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Tradable emissions have proven to be an efficient market-based tool for reducing the cost of pollution control. Exchanging emissions in competitive markets with low transactions costs can be used as a way of finding the lowest cost points of abatement in an industry or geographical region. The Congress used this approach in creating tradable sulfur dioxide allowances in the Clean Air Act Amendments of 1990 to reduce the cost of acid rain control, a policy which has demonstrated great success. New pollution control policies would benefit from the use of tradable emissions as a method of reducing a national abatement cost already estimated at over $100 billion.

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This report expands upon two JEC studies, The Impact of the Welfare State on the American Economy and The Impact of the Welfare State on Workers, which demonstrate that excessive government regulation has hampered economic growth and worker incomes. The report concludes that some economic rationality needs to be introduced to important regulations and that serious economic reform must reduce the size and scope of the federal government.

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This policy analysis provides a detailed overview of the Administration's practice of promoting Economically Targeted Investments (ETIs).

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The Administration has taken to advocating Economically Targeted Investments (ETIs). This six-page paper provides a detailed analysis of the ETI approach and concludes that the potential loss over a 30-year period would be more than $43,000 per pension-plan participant.

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This five-page update describes the Administration's agenda with regard to Economically Targeted Investments (ETIs). It also shows that liberal groups (e.g., the Center for Policy Analysis) are helping to formulate the Administration's ETI policies and are providing the program's driving force.

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This two-page document provides a brief overview of the topics covered at the JEC briefing that focused on ETIs. JEC staff and Professor Edward Zelinsky of Cardozo Law School discussed the history, present status, and the future of the Labor Department's policy of pushing pension fund managers to invest in Economically Targeted Investments.

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This is a compilation of selected quotes from Members of Congress, journalists, scholars, and organizations on the issue of Economically Targeted Investments (ETIs).

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This five-page document offers a variety of useful facts regarding ETIs and answers many common questions about this issue. Divided into six sections, this briefing covers various topics, including how ETIs first came into existence, examples of failed ETIs, and the benefits of enacting H.R. 1594.

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This two-page brief explains various aspects of the ETI issue: the Clinton strategy, ETIs and the law, early returns, and the solution (H.R. 1594). The summary gives a succinct analysis of the situation and how it affects workers' pensions.

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This update briefly addresses the Labor Department's promotion of Economically Targeted Investments. ETIs are programs designed to channel private pension investment into so-called socially-desirable projects such as public housing, infrastructure, and public sector job creation.

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This paper consists of excerpts from the speech given by Speaker Gingrich at the press conference that introduced the Pension Protection Act of 1995 on May 9, 1995.

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This is a compilation of JEC reports on the issue of increasing the minimum wage. These reports clearly document the economic arguments against an increase in the minimum wage.

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This report clearly demonstrates that raising the minimum wage actually increases unemployment. It also shows that the majority of minimum wage earners are young people still living with their parents or married individuals in a "two-earner" family.

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This four-page report explains how raising the minimum wage will result in fewer jobs for young and unskilled workers. It also addresses the errors made by the "Card-Krueger Study," which incorrectly concluded that raising the minimum wage would actually increase employment.

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This paper is a critical review of Labor Secretary Robert Reich and the Clinton Administration's flawed economic case for an increase in the minimum wage. Both the original "Reich Curve" and the "Nouveau Reich Curve" are explained and discussed.

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This piece consists of excerpts from Herman Cain's (CEO of Godfather's Pizza) testimony before the JEC hearing on the Clinton Administration's proposal to raise the minimum wage.

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This is Vice-Chairman Jim Saxton's opening statement before the JEC hearing on the Clinton Administration's proposal to raise the minimum wage.

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Contrary to the claims of the Clinton Administration, the weight of evidence on the minimum wage shows that increases in the minimum wage cause unemployment. These talking points provide a useful reference to over 100 relevant studies on the minimum wage and its effect on workers and the economy.

The Minimum Wage: Part 1 and Part 2 (Talking Points -- February 16 and 21, 1995)

These two papers offer facts about the minimum wage--who gets it, where they are likely to work, and the income level of their family unit. Facts on the minimum wage are presented in a framework useful for debating the issue. The talking points highlight a number of issues, including: 1) most minimum wage earners work at entry-level jobs; 2) they are not supporting a "family of four"; and 3) most minimum wage earners remain at minimum wage for a relatively brief period of time.

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This four-page paper summarizes a JEC briefing on the minimum wage. The history of the minimum wage and where it has been applied over time is reviewed.

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This one-page brief provides an easy-to-understand explanation of how and why a minimum wage increase is misguided economic policy. The analysis explores, from an economic perspective, the inevitable destruction of entry-level jobs and the burden placed on employers of marginal workers.

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WASHINGTON, D.C. – In 1975, U.S. workers with high school diplomas earned a real mean average of $28,471 (all earnings herein are in real 2005 dollars; see Chart 1 for increases in real mean earnings and Chart 2 for education premiums).  U.S. workers with bachelor’s degrees earned a real mean of $44,767, a premium of 57 percent more than high school graduates, while U.S. workers with masters, professional, or doctoral degrees earned a real mean of $60,714, a premium of 113 percent more than high school graduates.

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Great attention has been given recently to changes over time in the average incomes of "quintiles," families or households ranked top to bottom by income and divided into fifths. However, such time line comparisons between the rich and the poor ignore a central element of the U.S. economy, which is the extent to which individuals move from one quintile to another. This study is an analysis of data based on income tax returns filed from 1979 through 1988, that show the degree of income mobility in American society renders the comparison of quintile income levels over time virtually meaningless. This study notes that according to the tax data, 85.8 percent of filers in the bottom quintile in 1979 had exited this quintile by 1988. The corresponding mobility rates were 71 percent for the second lowest quintile, 67 percent for the middle quintile, 62.5 percent for the fourth quintile, and 35.3 percent for the top quintile. In fact, an individual who began the 10-year period in the bottom quintile had a greater chance at rising to the top by the end of the period than remaining at the bottom.

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WASHINGTON, D.C. - A comprehensive measure of median after-tax household income increased to $55,900 in 2005, reflecting a gain of 5.3 percent since 2000 and 26.8 percent since 1980, according to new Congressional Budget Office (CBO) data released today by Congressman Jim Saxton, ranking member of the Joint Economic Committee.  The data extend from 1979 to 2005, the most recent year for which data are available, and are adjusted for inflation. 

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WASHINGTON, D.C. –New income data show that the income growth rate of the top 1 percent of households between 2000 and 2005 slowed relative to that of the 1990s.  Between 2000 and 2005, the average pretax income of the top 1 percent increased 6.7 percent, compared to 38.1 percent for the 1992-1997 period, covering the first five years of the previous administration.  Between 1992 and 2000, the average income of the top 1 percent soared by 84.5 percent (all average income data measured in inflation-adjusted 2005 dollars).  The new data were released by the Congressional Budget Office (CBO) for the years 1979 through 2005. 

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WASHINGTON, D.C. – Recently released data showing the income share of the top 1 percent of tax filers at a relatively high level in 2005 says little about current trends.  This is the case because this share was at about the same level in 2000, after a very large increase during the 1990s.  In 2005, the income share of the top 1 percent was 21.20 percent of total adjusted gross income (AGI), not much higher than its level of 20.81 percent in 2000.  This share fell and recovered in the intervening years largely due to stock market fluctuations.  

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Social Security has a serious financial problem that will deteriorate if policymakers do not act to prevent it. While Social Security's income from payroll taxes currently exceeds its outgo in benefit payments, Social Security's trustees project that outgo will exceed income in 2017.

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This JEC study shows that real (i.e., adjusted for inflation) middle class family income, a commonly used method for evaluating changes in economic policy, rose significantly during the Reagan years but stagnated from 1992 to 1994. Data, explanations, and graphs clearly suggest that tax cuts and tax increases are historically associated with periods of rising and declining family income, respectively.

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This report presents the economic benefits of the Congressional balanced budget plan for a typical young American family. The figures are based on an economic analysis by DRI/McGraw-Hill on the implementation of the Congressional budget plan. By creating economic growth and lower interest rates, the Congressional plan would generate more than $2,300 in savings each year for an average American family.

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Given wider recognition of the real income growth experienced by low and middle income families in the 1980s, emphasis has been shifted to the disparity in income growth between the richest and poorest among us, as conventionally measured. The key question examined in this study is whether a more equal sharing of a shrinking income stream is preferable to an uneven improvement in income growth. The analysis discredits popular claims about the 1980s by pointing out clear facts such as between 1982 and 1989, the real middle class family income rose 13 percent; and as conventionally measured, the income of all income groups increased during the 1980s, whether 1980, 1981, or 1982 are used as base years.

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