Category Archive 'Welfare State Unsustainable'

09 Apr 2011

Do the Math

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Megan McArdle quotes her reader Trimalchio‘s explanation of why the Left’s Tax-the-Rich rhetoric is fraudulent.

For anyone who wants to discuss the revenue side of the budget debate knowledgably, I highly recommend spending some time with the IRS’s Statistics on Income. Table 1.1 under Individual Statistical Tables is a good place to start: http://www.irs.gov/pub/irs-soi

You can see, for example, that total taxable income in 2008 was $5,488 billion. Taxable income over $100,000 was $1,582 billion, over $200,000 was $1,185 billion, over $500,000 was $820 billion, over $1 million was $616 billion, over $2 million was $460 billion, over $5 million was $302 billion, and over $10 million was $212 billion. Effective tax rates as a percentage of taxable income seem to top out around 27%.

You can estimate the effects of various proposals in the best case, which is that each percentage point increase in the marginal rate translates to an equal increase in the effective rate. Going back to 2000 (“Clinton era”) marginal rates on income over $200,000, let’s call it a 5 percentage point increase in the marginal rate, would therefore yield $59 billion on a static basis. Going from there to a 45% rate on incomes over $1 million (another 5 percentage point increase) yields an additional $31 billion. Or, instead, on top of 2000 rates over $200,000, 50%/60%/70% on $500,000/$5 million/$10 million? An extra $133 billion, or nearly 1% of GDP. That’s not accounting for the further middle class tax cuts that are usually proposed along with these “millionaires’ taxes.”

Now, compare this to deficits of $1,413 billion in 2009 and $1,293 billion in 2010, and using optimistic White House estimates, $1,645 billion in 2011 $1,101 billion in 2012, $768 billion in 2013, and continuing at over $600 billion after.

Alternatively, you might also notice that while taxable income in 2008 was $5,488 billion, adjusted gross income on all returns was $7,583 billion on taxable returns only (with an additional $680 billion on untaxable returns), which means that $2,095 billion isn’t even in the tax base. $592 billion of that difference is exemptions, which are not tax expenditures, and $1,512 billion is deductions, which are mostly tax expenditures.

My point is just that I don’t see how deficits this large can be closed with income taxes on the rich, even at marginal rates far higher than anything we’ve seen in the post-1986 era. Paying for spending at near-term levels, not even considering entitlement and interest payments that will accelerate a decade out, would have to include meaningful base broadening by eliminating tax expenditures like the mortgage interest deduction or the employer health case deduction, or would have to rely on new taxes like a VAT.

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Even if we outright confiscated the wealth of all of this country’s billionaires, we couldn’t break even for this single year.

The grand total of the combined net worth of every single one of America’s billionaires is roughly $1.3 trillion. It does indeed sound like a “ton of cash” until one considers that the 2011 deficit alone is $1.6 trillion. So, if the government were to simply confiscate the entire net worth of all of America’s billionaires, we’d still be $300 billion short of making up this year’s deficit.

That’s before we even get to dealing with the long-term debt of $14 trillion, which if you’re keeping score at home, is between 10 to 14 times the entire net worth of all of the country’s billionaires, combined.


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