Can we dig ourselves out of this hole by taxing the rich?

by philg

Barack Obama proposes to dig the Federal government out of its deficit hole with higher taxes on the 2 percent of Americans with the highest income. Today’s Wall Street Journal carries an analysis of what would happen if the government could confiscate 100 percent of those folks’ earnings. The depressing conclusion is that it wouldn’t be enough money.

13 thoughts on “Can we dig ourselves out of this hole by taxing the rich?”

  1. It’s always popular to solve problems with other peoples money, but what if the United States were based on Capitalism? And people actually paid for the services that they used? Which taxpayers are paying a market price for the “services” that the federal government provides?

    It’s difficult to even answer the question since most of the “accounting” the government does is a sham (e.g. including payroll taxes in the general budget, yet excluding the liability of future Social Security/Medicare payments, no inclusion of the Iraq war, etc.). But, according to the CBO, the government will spend $3.66 trillion in 2009. There are roughly 333 million Americans. So that works out to $10,990 per person in America. Thus a family of 4 would have to pay about $40k/year.

    That probably means that only families making over $150K (assuming a blended tax rate of 25%) are even close to pulling their weight. Everyone making less is getting a free ride on their backs or contributing to the debt. Rather than thanking these people, they are targeted to “contribute” more.

    Also, if we were to divide up the National debt equally, every American man, woman & child would owe $32.5K. And that’s not including Social Security and Medicare, because the government considers those numbers unpleasant. Add those in, and depending on whose accounting you use, it’s around another $150K per person.

    At some point, the politicians won’t be able to pass debt onto our children and grandchildren, but like the credit card junkie moving balances from card to card, trying to minimize their monthly payments, eventually the jig is up.

    As Tytler said “A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.”

    I’ll admit these numbers are all approximations and thumbnail calculations, but they are honest estimates. I used these websites:

    http://www.treasurydirect.gov/NP/BPDLogin?application=np
    http://money.cnn.com/2009/02/23/news/economy/orszag_budget_request/index.htm?postversion=2009022311
    http://treas.gov/press/releases/reports/factsheetwhopaysmostindividualincometaxes.update.pdf

  2. If we are allowed to assume the goal of politicians is to get (re)elected, then I refer to the (paraphrased) quote “When taxing Peter to reward Paul, you can always count on Paul’s vote”.

  3. Phil, I am surprised that you haven’t brought up the point that income taxes are wholly unnecessary.

    The US gov’t creates money by fiat, there is no underlying asset to serve as a brake on the amount of dollars put into the system (as there would be under a silver and/or gold standard).

    Thus, income taxes are not actually needed – inflation, in the form of each dollar being worth less over time as more dollars are created by the US gov’t, would be the only “tax” that would apply.

    Would you rather have 5% inflation and 50% effective tax rate? Or 10% inflation and 0% tax rate?

  4. Not to undermine the point of the article, but the summary that confiscating 100% earnings of the 2% with the highest income isn’t enough isn’t supported by the article, unless the projected $4 trillion of expenditures in 2010 can’t be lowered and still meet Obama’s goals.

    It has two data points: 100% of those earning $500,000 or more yields and extra $1.3 trillion, and 100% of those earning $75,000 yields over $4 trillion. It doesn’t say how much would be yielded by 100% of those over $250,000, presumably much more than $1.3 trillion.

  5. I have a feeling that the US gov will just print money to escape the current debt. It is lucky because the US debt to China in denominated in USD, rather than Yuan.

    Right now I expect that foreign countries are trying to exit USD as fast as possible, but without causing a panic that would devalue the rest of their holdings. Being able to mint the world’s reserve currency is a good thing, but I can’t imagine people hanging around watching their investments getting inflated away.

  6. Patrick… Well done… You have described very accurately how *Russia* works. Russian oil (gas/gold etc) “revenue” not really a “tax” but an “apportionment of mined asset” that doesn’t come close to what Russia calls “national budget”.

  7. Dear Patrick, you were saying:

    > there is no underlying asset

    The underlying asset is the US Government’s ability to collect future taxes. This is their future income that guarantees to creditors that their money will be paid back. So taxes are vital, really. Otherwise, the fiat money printed by the USG would be made worthless by hyperinflation (think 3000% per day, not 7% per year).

    John Galt:

    > Which taxpayers are paying a market price for the “services” that the federal government provides?

    All of them. Consumption of government services is proportional to economic activity, which income is an excellent proxy for. So if you make twice as much, you are likely to consume at least twice as many services, including access to public infrastructure, public defense etc. These are hard to quantify, so people tend to forget about them. I am saying at least twice as much because actually you are likely to consume more : for twice the income, you’ll consume about twice for earning it, plus about twice for spending it. This is one of the motivations for progressive tax schemes. Progressive tax schemes also help against the creation of oligarchies and plutocracies (inherited wealth tends to mean inherited power), which we can all agree are contrary to democracy (just look at today’s Russia for an easy example). Unfortunately, such systems are needlessly reviled in the US for being “socialist” or “communist” (the fact that some communist countries used them does not make them inherently evil).

  8. @patrick, At least in the second scenario (10% inflation/0% tax), you’d have the opportunity to invest you’re income in something to (hopefully) protect you against inflation.

  9. @ovic I don’t get anywhere near twice as much from the government. Nearly 50% of it’s budget are transfer payments to social security and medicare. I fail to see how protecting my freedom is twice as costly as another mans. Likewise for my contribution to veterans. That’s pretty much 3/4 of the budget.

    The motivation for the progressive tax scheme is to take as much as possible in order to buy votes. In a free society with a real constitution, wealth does not equal power or influence.

  11. I’ve never seen anything that states that taxing the very rich would do anything other than cover a very small amount of the government spending.

    I had always assumed the point of this kind of tax was more about social re-engineering, rather than finance. To gradually help redirect the very rich from directing their considerable energies from gathering yet more money and into other, perhaps more rewarding, activities.

    I reference BusinessWeek’s article about Denmark – the world’s happiest people according to several surveys, despite (or because of) an approach of “high taxes and aggressive redistribution of wealth” and indeed “the world’s highest tax level in 2005 and 2006” [wikipedia]
    http://www.businessweek.com/globalbiz/content/aug2008/gb20080820_005351.htm

    I have heard, anecdotally, that this is mainly due to the Danish government targetting quality of life over simple economic concerns, and certainly wikipedia points to it as having the most equally distributed standard of living among the Western European countries:
    http://en.wikipedia.org/wiki/Economy_of_Denmark

    My point is, given an either/or choice, would you choose wealth or happiness?

  12. Phil said:
    “Right now I expect that foreign countries are trying to exit USD as fast as possible, but without causing a panic that would devalue the rest of their holdings. Being able to mint the world’s reserve currency is a good thing, but I can’t imagine people hanging around watching their investments getting inflated away.”

    But aren’t a lot of foreign countries having the same problems as we do, perhaps even worse. Iceland is about to or already have gone bankrupt. The rest of the European community is not doing much better. There has been talk of just giving up on East Europe. With that in mind, wouldn’t the USD do at least OK? The USD seems to have held up fine against Euro over the last 3-4 months.

  13. Canadians know (from past experience) that if your gov’t is heavily in debt. you must eventually increase taxes to pay off interest and principle. There is no escaping this.

    Republicans also know this. That’s why they are freaking out about stimulus and bailout packages.

    They have succeeded for the past 8 years in simultaneously increasing their wealth, lowering their taxes, and “starving the beast” of gov’t, only to have their master plan backfire in a big way.

    Now they’re getting the diametric opposite of what they’ve worked towards.

    Taxes have to be high enough to keep everything running, but should be no higher.

    For the past 8 years, the US has been trying to save money by not performing oil changes on the engine of the economy. Now the engine has exploded and the cost of repairs is much higher than the amount foolishly saved.

    Luckily, the US is one of the lowest taxed countries in the world, so there is room for increasing taxes without undue burden on tax payers.

    http://economistsview.typepad.com/economistsview/2006/05/the_us_tax_burd.html

    No one is suggesting that just the wealthy foot the bill for stimulus/bailouts, even though they have been the primary benefactors so far.

    In Canada, the middle class pays the majority of the taxes. Nobody complains too much, because they get good value for their money (in services).

    You’ll also notice that so far we’ve survived this crisis better than most. Higher taxes and better regulation are major reasons why.

    In fact, if our idiot prime minister hadn’t lowered our goods & services tax a few years ago, we could have probably gotten through this recession without running a deficit. That’s the difference between fiscal conservatism and right-wing conservatism.

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