New Policy Brief from The Heartland Institute Explains How Raising Taxes Would Increase Federal Deficit and National Debt
ARLINGTON HEIGHTS, IL (March 25, 2025) – Since the end of World War II, the federal government has never been able to increase tax revenues above a certain, specific level for any length of time by increasing tax rates. There is a natural limit on what the U.S. government can take away from the American people each year, and nothing the government has tried over the past eight decades has ever been able to change that.
Any attempt to deal with ongoing federal budget deficits and an excess accumulation of debt obligations must accept that reality. No amount of tax rate hikes and new taxes would raise any appreciable amount of additional federal revenue. The tax side cannot solve our persistent deficit problem.
Only economic growth will do that, Heartland Institute Senior Fellow S.T. Karnick explains in a new paper titled “Federal Budget Deficits and the Iron Law of Federal Revenue.” The impact of robust economic growth will be cumulative, over a period of years, and initially limited on an annual basis.
There is no way to raise federal revenue rapidly at present. With the budget deficit currently at an all-time high, the inability to achieve a rapid rise in revenues means reforms must be on the spending side—unless the government chooses the catastrophic course of devaluation of its debt through monetary inflation. There is no other option. Until policymakers and the public accept that reality, there can be no serious progress toward reduction of the rising federal deficit and national debt.
“There is a hard limit on how much the federal government can take in through taxes, regardless of what the tax rates are and what is taxed, as history shows clearly,” said Karnick. “As a result, the only way to reduce the federal deficit is to cut spending and remove all unnecessary regulations. Nothing else will rescue the U.S. economy and avert a fiscal collapse of the federal government.
“The historical data clearly show that increases in tax rates cannot improve tax revenues as a percentage of economic output over more than a month or two,” he added. “The only way to increase tax revenues is to grow the economy. That will require major reductions in federal tax rates and regulation. That is the only possible solution to the federal debt and deficit problem.”
To speak with Karnick, please contact Vice President and Director of Communications, Jim Lakely, at [email protected] or call/text 312-731-9364.
The paper outlines how:
- Federal tax revenue has historically hovered within 1 or 2 percentage points of 17.4 percent of GDP since World War II, no matter what the tax rates have been and what is taxed.
- There is a natural limit on what the U.S. government can take away from the American people each year, and nothing the government has tried over the past eight decades has ever been able to change that.
- The pursuit of ever-higher “taxes” through higher tax rates and/or taxes on more goods and services fails because raising tax rates and raising tax revenues are completely different. Raising taxes on an activity reduces the amount of that activity.
- The inability to achieve a rapid rise in revenues means effective reform will require major spending cuts.
- It is possible to increase tax revenues over the long term by increasing the tax base. The only way to expand the nation’s tax base is through economic growth.
- Cutting tax rates and regulations expands the economic pie from which the federal government claims its share, as demonstrated by the Kennedy, Reagan, and Trump tax (rate) cuts.
In this paper, Karnick explains and discusses the federal deficit and debt trends, the “hard revenue limit,” tax rates vs. tax revenues, hidden tax cuts, and more.
Karnick concludes: “The only way to solve the federal budget problem is through tax rate cuts, spending cuts, and removal of all excess regulations on economic activity. Together, these will increase revenues, reduce spending, grow the economy, and allow paydown of the national debt over time.”
The Heartland Institute is a national nonprofit organization founded in 1984 and headquartered in Arlington Heights, Illinois. Its mission is to discover, develop, and promote free-market solutions to social and economic problems. For more information, visit our website or call 312/377-4000.
