What Is a Tax Hike?

July 27, 2009

“Tax hike.” We hear the phrase often. But what does it really mean? Does it include any policy that increases the amount of revenue going to the government? Or is it any policy that increases the total burden of taxation? The two are not the same, as any economist will tell you.

For example, suppose Congress overhauled the current tax system today and replaced it with a simple tax system that removed many exclusions, deductions, and credits. Yet suppose this new system raised $1 more in revenue than the current tax system.

Would this be a “tax hike?” It would raise more revenue, but it would also significantly reduce the deadweight loss of taxation. In fact, the total burden of taxation (revenue plus excess burden plus administrative costs) would likely decline significantly.

Auerbach makes this point in Chapter 8 of this book on the good and bad of distributional analysis. He takes it to the extreme by using the Laffer Curve. If tax rate cuts at some level pay for themselves, then aren’t such tax cuts no-brainers to support? Not if you are only concerned with revenues because such a tax rate cut would actually be called a tax hike according to that definition. On the other hand, if you are concerned with the total burden of taxation, such a tax cut is indeed a no-brainer even if government ends up having more money to spend.


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