Eye onthe Market | July25, 2011 J.P Morgan Topics: US debt ceiling negotiations, a more ambitious European bailout plan (finally), and how large cap growth stocks and rising corporate profits are patiently waiting for both of them to end I have a feeling that revenue increases will be a material (e.g., 25% or more) part of the deal. The Peterson Foundation’s sampling of 6 policy groups shown below indicate that 5 of 6 recommend revenue increases compared to where we are today; the Heritage Foundation’s “Woody Guthrie Memorial Budget Plan” is the only exception. What kind of revenue increases? Raising the top two brackets, which would affect joint filers with adjusted gross incomes above $212,300, would raise $450- $700 billion over 10 years (depending on whether you use OMB or CBO numbers). If they cannot agree to raise rates, another option (as in the Gang of Six plan) would be reductions in the deductibility of state and local taxes, sales taxes, mortgage interest, etc. As this gets sorted out, let’s hope everyone recognizes that the US tax system is already progressive. As shown in the chart below, effective Federal tax rates for low earners have dropped to zero over the last decade, even after including FICA taxes. News reports that the US tax system is regressive make me want to throw hamburgers at the screen. Revenues and Spending as a % of GDP Revenues Spending What a progressive income tax system looks like Fiscal year 2011 453% 24.1% nese nes effective federal income and FICA tax rates Fiscal years 1950-1969 17.5% 18.1% ° High earners Fiscal years 1970-2010 18.0% 20.8% 20% Estimates for 2035: ee ne atermeiNe case 10% Median merican nterprise . eariiere Bipartisan Policy Center 5% Center for Am. Progress 0% Economic Policy Institute 7 Heritage Foundation -5% SASS HIGES Roosevelt Institute 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: OMB, CBO, Peterson Foundation 2011 Fiscal Summit. Source: Tax Policy Center. Europe: Finally (1!), but