As the political fight over raising taxes for high-income Americans fades away, so are predictions for negative economic fallout.
The bill for President Barack Obama’s 2013 tax increases comes due April 15, and the first boost in marginal income rates in 20 years is already reducing the U.S. budget deficit without tipping the economy into recession.
“In advance one always hears the squeals of the oxen who would like everyone to think they are about to be gored,” said James Galbraith, an economist at the University of Texas at Austin. “Then it turns out that they are only nicked, and life goes on.”
The U.S. government is projected to collect more than $3 trillion for the first time in the fiscal year ending Sept. 30, a 9.2 percent increase over last year, according to the Congressional Budget Office. CBO forecasts another 9 percent rise in 2015 and estimates that more than half of the increases in revenue stem from tax law changes.
Because of tax increases, spending cuts and economic growth, the federal budget deficit is projected to be 3 percent of gross domestic product this year. That’s less than half its 2012 level and the smallest budget deficit since 2007.
In January 2013, just after President George W. Bush’s tax cuts expired, Congress reset the top marginal income tax rate at 39.6 percent, the same level it reached under President Bill Clinton.
High-income taxpayers face additional levies, effective in 2013, to help pay for Obama’s health-care plan. That means those at the very top of the U.S. income scale face higher marginal tax rates than at any time since 1986.
The increases started generating revenue for the government in late 2012, when taxpayers began accelerating capital gains and bonus income to avoid paying at the higher rates.
The high-income tax increase sapped 0.25 percentage points from GDP in 2013, estimates Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. That slight economic drag, he said, shouldn’t continue.