In all the negotiations to prevent the fiscal cliff from hurting the economy, potential compromises keep coming apart over the issue of raising income tax rates, especially on high earners. Income taxes stir up strong feelings among voters because of concerns about fairness — and politicians exploit those emotions, whichever party they belong to. As a result, the broader budget discussion keeps getting diverted to focus on tax rates, which actually play only a small role among the causes of current U.S. financial troubles.In fact, there are really two different budget problems that often get mixed together. One is the current deficit, which totaled more than $1.1 trillion last year, almost double the amount that the U.S. economy can comfortably carry. The other is the long-term accumulation of debt. Even after the U.S. economy fully recovers from the effects of the recession, the federal deficit is projected to remain too high. As a result, the national debt is on course to keep rising as a percentage of GDP until it reaches dangerous levels.
It’s true that the top tax bracket has come down substantially over the past half-century — from 91% when President Kennedy took office, 70% when President Reagan took office and 39.6% when President George W. Bush took office to 35% today. But rates are only one element of income tax policy — the rules for what counts as income and what deductions are allowed are just as important. Mitt Romney enjoyed a low effective tax rate, for instance, because he received much of his income in the form of capital gains.
In the end what really matters is how much revenue the tax system raises. That amount, measured as a percentage of GDP, normally drops during recessions, as it did recently. But once the economy fully recovers, federal revenues are projected to be about the same as they have been for the past half-century.
Read more: Fiscal Cliff: 4 Misconceptions About Taxes and the Deficit | TIME.com
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