CBO: Everyone’s taxes will go up quietly
By: Brian Faler
July 16, 2014 11:16 AM EDT
The value of the mortgage interest deduction will be cut by nearly half.
Many more will owe taxes on their Social Security benefits. And Obamacare taxes aimed at the well-to-do will begin hitting a lot more taxpayers.
Even if Congress does nothing, rising incomes, inflation and other factors will quietly push up taxes over the next 25 years well beyond historical averages, the Congressional Budget Office reported on Tuesday.
The increases will hit everyone, though low-income Americans will be hit particularly hard as rising wages make many ineligible for the anti-poverty Earned Income Tax Credit.
“Even if no changes in tax law were enacted in the future, the effects of the tax system that would be in place would differ in significant ways from the effects of the tax system today,” the agency said in a report examining the government’s long-term budget outlook. “People throughout the income distribution would pay a larger share of their income in taxes” and “many taxpayers would face diminished incentives to work and save.”
A family of four earning half the median income in 2039 — about $73,200 by CBO’s calculation, which includes the value of tax benefits like health insurance through work - would pay 10 percent of their earnings in individual and payroll taxes, up from the current negative one percent.
Likewise, those at the top of the income spectrum will also see their taxes rise. A family of four earning four times the median income in 2039 — $585,600 — would pay 31 percent of their income in taxes, compared with today’s 28 percent.
Tax receipts in 2039 will total 19.4 percent of the nation’s gross domestic product, a level rarely seen since the last half century and easily topping the 17.4 percent average seen over the last 40 years.
The growing tax bite will come even as government debt approaches levels unseen since the wake of World War II, CBO said, thanks to rising health care costs, the aging of the population and increased interest payments on the debt. So lawmakers may have a hard time undoing the tax increases because that would worsen the government’s budget deficit.
What’s more, the increases will come slowly, without all the fireworks of a major tax hike making its way through the Capitol. CBO sees more subtle factors at work, including rising incomes.
Much of the tax code is not indexed for income growth, which means as people’s earnings rise, they get pushed into higher tax brackets while simultaneously losing certain tax breaks. Income growth will push many out of the child tax credit, as well as the Earned Income Tax Credit, CBO said. By 2039, the proportion of taxpayers claiming the EITC will fall to 13 percent from 16 percent, the report said.
Other parts of the code are not indexed for inflation, including elements of Obamacare.
The health care law is financed in part by a 3.8 percent “net investment tax” on the capital gains, dividends, interest and other investments claimed by couples earning more than $250,000. Lawmakers did not index those particular provisions for inflation so more people will gradually become subject to them, because of increasing incomes as well as rising prices.
The Affordable Care Act also imposed a 40 percent excise tax on gold-plated insurance policies scheduled to take effect in 2018. That tax is linked to changes in overall consumer prices, though CBO projects health care costs will grow faster than that over the long term.
And even if people switch to lower-cost coverage to avoid that tax, they’ll still get hit with other levies. That’s because CBO says their total compensation is unlikely to change — they’ll simply receive more of their pay in the form of wages rather than health care benefits, which means they’ll pay higher income and payroll taxes.
“Whether policyholders decided to pay the excise tax or to avoid it by switching to lower-cost plans, total tax revenues would ultimately rise,” the report said.
Other popular tax breaks will decline in value because Congress never linked them to inflation. The hugely popular mortgage interest deduction, currently capped at interest taken on $1.1 million in mortgage and home equity debt, will be worth less than $600,000 in 2039 when measured in today’s dollars, according to CBO.
Meanwhile, the portion of Social Security benefits subject to taxation will grow to 50 percent from the current 30 percent, CBO said. That’s because the threshold at which those taxes kick in was never indexed for inflation.
Even tax provisions pegged to inflation will decline in value over time. The $3,950 personal exemption will grow by 80 percent between now and 2039, CBO projects. But its value will nevertheless fall by more than 30 percent because incomes will grow even faster.
At the same time, the very same demographic trend that’s projected to push up Medicare and Social Security costs — the retirement of the Baby Boom generation — will also increase tax receipts as those born between 1946 and 1964 begin emptying out tax-deferred retirement accounts and collecting pensions.
The increases in revenues won’t keep anywhere near the pace of projected government spending, so CBO still sees debt growing rapidly over the next quarter century.
“Budget deficits are projected to rise steadily and, by 2039, to push federal debt held by the public up to a percentage of GDP seen only once before in U.S. history (just after World War II),” the report said.