Tuesday, April 19, 2011

Why Taxing The Rich Isn't Good Enough

"Tax the rich!" is a great rallying cry, but it's not going to solve our national financial problems. "Cut foreign aid!" isn't going to work, either, although it's not necessarily a bad idea. "Cut farm subsidies!" and "Stop funding PBS, NEA, and NPR!" are great ideas, too, but not necessarily because we're going to balance the budget by doing so.

Why won't taxing the rich, who don't pay their "fair share" (whatever that means), work? Because they don't make enough money to solve our problems:
A dominant theme of President Obama's budget speech last Wednesday was that our fiscal problems would vanish if only the wealthiest Americans were asked "to pay a little more." Since he's asking, imagine that instead of proposing to raise the top income tax rate well north of 40%, the President decided to go all the way to 100%.

Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is...

We recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let's perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world's problems.)

In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.

So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The nearby chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.

Tax at 100% everyone who makes over $100,000--just confiscate their earnings--and we still can't balance the budget for one year. That's how much we're spending ourselves into debt. Additionally, if we confiscated all the wealth of all the billionaires in this country--not just their annual earnings, but all their wealth--that would not balance the budget for one single year. And then that wealth wouldn't be around to generate jobs (and tax revenue) next year.

Those who want someone else to pay higher taxes--well, ask not for whom the tax bell tolls, it tolls for thee. Go look at the referenced chart and see where that first big jump in money is (hint, it's at $50,000 in income).

There are only two ways out of this mess, and those are entitlement reform (that's where our biggest expenditures are) or just--I can't even bring myself to contemplate the Weimarian inflationary disaster that would arise from just printing money and our defaulting on our debts.

Socialism doesn't work--because it's a Ponzi scheme. It's too expensive. And we need to get off this ship now, while the waves are lapping over the Promenade Deck, and not wait until the Sun Deck is almost under water.


mazenko said...

Where to begin? Hmmmm.

Of course higher taxes won't end our debt in a year or two, and no one is proposing it could. And no one is proposing 100% confiscation, which is absurd. Of course, marginal rates of 89% existed during the country's exceptional economic boom from 1945-1965. Not that I'm arguing higher rates solve the problem - just that they don't necessarily cause more problems. The economy is about far more than marginal tax rates.

However, had rates not dropped to historic lows over the past decade, the debt would be far, far less. Extrapolate the lost revenue over twenty years and the case is obvious for allowing rates to rise for the wealthiest. If, for the past thirty years, capital gains and dividends had just been taxed as income, as uber-rich people like Buffett and Gates have proposed, and FICA was not capped, this current debt crisis would hardly exist. So, raising taxes on the rich - over the next decade or so - will do wonders in paying down the debt. And the garbage about "killing jobs" by "punishing the job creators" is exactly that, garbage. Supply and demand doesn't work that way - and no effective business owner turns down a good investment or refuses to expand his business simply because he might pay 19%, rather than 15%. A good deal is a good deal and business investments are made on timeliness first.

The comments about foreign and PBS/NEA/NPR are political not fiscal. As is the comment on Ponzi schemes and socialism. Social insurance is a good investment for any society - just look at the economies of Singapore and Germany - and the debt problems are essentially solved through means testing and allowing the government to negotiate with providers. Just look at prescription costs for veterans if you disagree. And we've actually been "printing money" since the 1970s and the boat is afloat.

Limit/end corporate welfare (agree with you there), means test the safety net and allow for negotiations and cuts without hysterical "killing grandma" cries, cut back the military/security behemoth, don't cut taxes to "spur growth," plan to pay for wars while fighting them, and have a nice day.

Darren said...

Germany isn't doing so hot, not sure about Singapore (but would you want a government like Singapore's), but you completely lost me when you said "the boat is afloat". The Titanic was afloat for several hours after hitting the iceberg. Your comment is akin to jumping off a 25-story building and, as you pass the 5th floor, saying, "See, I'm still fine."

Our social welfare state costs too much. We ought not merely to trim it back, we need to hack off large parts of it.

Anonymous said...

I think you are betraying "in the box" thinking when you restrict yourself to having tax rates cap out at 100%.

How about we tax at greater than 100%? We can, you know, if we are willing to take assets ...

It is possible that this wouldn't work out so well in the long run, but I don't get much sense that congress is full of people who think about the long run (or, if they do, I don't see much evidence that they act on it).

Bill Gates could *easily* afford a 1000% tax rate.

-Mark Roulo

mazenko said...

You've made the jumping out the window comment before - but it's not relevant to what I said. I, in no way, argued that we shouldn't being paying down the debt by cutting spending and raising revenue.

My boat comment was in relation to your "printing money" comment. Though it is also relative to debt as well - I remember people in fiscal hysteria when the debt was $5trillion, arguing if it ever went to $10 we'd go bust. Guess what? You don't know what the sinking point is, but estimates of $20trillion are not unfounded. BUT AGAIN, I'm not saying the debt isn't a problem. It is, and could be paid down by cutting spending and raising taxes.

Only one proposal plans to do both. Cutting revenue by another $4trillion is a terrible idea. And raising marginal rates on income and capital gains while closing deductions will not inhibit a recovery and debt pay down.

maxutils said...

Before we can do anything meaningful, we need to combine income and FICA taxes. Keep the two apart, and we will continue to get the same FOX news 'the wealthy pay every cent of taxes' reports, while the poor and middle class get hammered.

Ellen K said...

Here's the problem, what is the definition of "rich?" To someone on welfare anyone with a job is rich. To someone in the middle class, anyone making $100K is rich. It's a very relative thing. There's no question that the rich have the ability to shelter wealth and avoid taxes. It's what they do. But I also know a heck of a lot of middle income millionaires who live to the n-th degree of their credit limit and then complain when they can't buy more. At some point we are going to have to have the discussion about quality vs. quantity. It seems right now people are content to spend all their money on lots of things, no matter how poorly made or ill conceived. I have more respect for the millionaire that saved money by buying one good car that lasted thirty years than I do for middle income wannabes that take out loans they can't afford. It appears that this administration wants to punish economic wisdom via taxation. They will probably attempt another luxury tax. The last time that was tried, unemployment for industries that make and sell luxury items were hit hard. If this president really wanted to grow the economy he would stop subsidies for ethanol, let gas companies drill domestically and stop sending millions in aid overseas to nations that hate us. I realize this smacks of common sense and we are talking about politicians, but I am an optimist.

mazenko said...


Rich is relative to region - but it's pretty indisputable when you hit $500K to $1million year. Your comments on punishing economic wisdom is nonsense - taxes are about raising revenue, period. It's not about growing the economy. Foreign aid is about $15 billion a year - and it's not about "nations that hate us." Often aid can prevent the rise of the hatred. You're absolutely right on subsidies - but make it the entire corn industry, not just ethanol - and add to that every other multinational. You're off base again on domestic drilling because such commodities don't stay local - they enter the global market.

Ellen K said...

Then please explain how my husband and I, who have just one paid off credit card and a modest home end up paying thousands in taxes while relatives who have dual incomes and spend it all end up with money coming back.

mazenko said...

Great book for you to read. It's called Perfectly Legal, and it reveals how effectively the wealthy learn to legally manipulate the tax system. That's what some, such as the Simpson-Bowles plan, seek to close. For example, who ever thought that mortgage deductions were necessary for people earning into the millions and buying a second or third home.