Recessions are bad business for government. Total taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. receipts are down 18 percent this year, the lowest yearly drop since 1932 the AP reports. Individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. receipts are down 22 percent and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. receipts are down 57 percent.
States are getting less revenue too. So far, combined state shortfalls are over $160 billion. Contributing to this number is New York. They face a $2.1 billion budget gap from declining tax revenue. And as E.J. McMahon, director of the Manhattan Institute’s Empire Center for New York State Policy, writes, this is after raising taxes on high-income households by up to 31 percent.
It might now be tempting for states like New York to return to the very tax policies that contributed to their deficit-relying heavily on the volatile income of high-earners. Hawaii and Oregon have recently increased income tax rates on this subset. It is a short-term fix and a long-term mistake.
Back in 1932, when the federal government deficit was $2 billion, Secretary of the Treasury Andrew Mellon testified before the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. concerning tax hikes. He warned:
The truth of the matter is that our revenue system rests on a comparatively narrow base, and that our tax receipts are susceptible to the widest variations in accordance with variations in business conditions. This is particularly true of current individual income-tax collections…the weakness in our revenue system is, as I have already stated, the narrowness of the base on which it rests.
He didn’t think the government could rely on the rich to balance the budget then; we shouldn’t think that today.
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