A tax deficit occurs when government expenditures overtake income from tax revenues.
Deficits can occur on many levels, whether they be a business’s budget deficit or even in personal budgets. On a national level, accumulated fiscal deficits add to the national debt. It is also a source of inflation and, if not corrected, will ultimately lead to a recession.
Can Income Tax Hikes Close the National Deficit?
It is possible, but income tax hikes would have to work in conjunction with other strategies, such as raising other taxes and deficit reductions, as income tax is only one part of the U.S. tax apparatus. Otherwise, the tax hikes would be untenable.
If income tax hikes were solely used, the lowest tax bracket could see rates rise up to 25%, and the highest could see rates in the high 80s. This could serve as a major blow to economic growth. Realistically, there would need to be significant reductions in the government’s spending as well as other solutions in tandem to help close the fiscal deficit.
How Does the Tax Deficit Affect Individuals and Economic Growth?
A large tax deficit can affect individuals and economic growth in multiple ways. Deficits can lead to higher marginal tax rates, which can discourage saving, investing, etc. It can also contribute to inflation, which in turn can lead to low economic growth.
That being said, it’s contested at what level high tax deficits begin adversely affecting the economy. At the same time, it is vitally important to observe the tax deficits as they will ultimately affect you in the long run.
Learn More About Taxes
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