With the Presidential nomination sweepstakes and popularity contest already opening up, we’re all going to be treated to another year of claims and counterclaims, and, if the President’s recent remarks and the Republican candidates’ counter-claims are any indication, a good proportion of the rhetoric is likely to center around taxes.
As I understand the respective positions, the Democrats feel that, because wealth has become more and more concentrated, particularly in the last decade, the “wealthy” [however they’re defined] should pay a greater share in taxes, and that would be determined by closing various “loopholes” and creating a higher tax rate for the top income categories, roughly above $250,000. The Republicans counter by saying that higher rates are counterproductive economically and that those who are above the “middle class” already pay a disproportionate amount of federal income tax.
While statistics need to be viewed with care, and I know, having spent many years as an economist, I decided to take yet another look at the IRS statistics in light of the present and likely the coming campaign charges, even though I know that few are likely to change their minds based on mere statistics.
According to IRS statistics, during the period from 1951 to 1980, the percentage of Americans who paid no federal income taxes essentially remained stable at between 21-22%. Beginning in the 1980s, the percentage of taxpayers who paid no federal income tax began to rise, hitting 32% in 2004, 47% in 2009, and an estimated 53% in 2010.
At the same time, the percentage of tax revenues paid by the “middle class” also declined, with the percentage of total income taxes paid by the “middle class’ [defined as those taxpayers comprising those making more than the median wage, but less than the top 10%] declining from almost 40% of all income tax revenues to about one quarter of all tax revenues. At the same time, the top ten percent of taxpayers went from paying roughly 45% of all income taxes to paying 70% of all income taxes.
Put another way, 53% of all taxpayers, largely those in the bottom fifty percent of taxpayers in income terms, paid no taxes. The next third [37%, if we’re being more precise] paid 30% of all income tax revenue, and the top 10% [those with taxable incomes above $115,000] paid 70% of all federal income tax revenues.
At present, the current federal deficit is running close to one and a half trillion dollars annually, and federal income tax revenues are bringing in around $850 billon. The most obvious, and most bandied about, solution is to increase taxes on the rich, but there are a number of problems with this solution.
First, the reformers on the left confuse is “wealth” with “income,” and unless the Congress changes the tax law, the IRS and the Congress can only tax income, not wealth. According to the latest IRS statistics, the eight thousand wealthiest Americans earned a combined total of $239 billion in 2009. Assuming that Congress sees fit [which they won’t] to increase the marginal tax rate on millionaires and billionaires to 90%, and also assuming that they’re smart enough to get rid of all the deductions for these individuals, the total federal income tax revenues would total a little over $215 billion. Given that this year’s federal deficit will be roughly $1.4 trillion, taxing those less wealthy would also be necessary to get rid of the deficit by taxing the “rich.” The 14,000 odd taxpayers who earned between five and ten million dollars a year had a total income of $95 billion, and a 90% cut of their income would raise $85 billion. But since these taxpayers already pay close to $100 billion, the additional tax revenues would only be $200 billion. That’s still not enough. In fact, if a 90% rate were applied to all taxpayers with an income above 1 million dollars, the total additional revenue raised would amount to $300 billion. That leaves a short-fall of well over a trillion dollars… and the only people left to tax are those who are complaining the most about being overtaxed. For the 81 million people who aren’t millionaires, to cover the remaining deficit through income taxes would require an average tax increase of over $12,000 a tax return.
Again, if one only wishes to tax the remaining “rich,” i.e., those making over $200,000 a year, that won’t work either, because taking all their taxable income would just barely cover that remaining trillion dollar deficit.
So… in essence, even a 90% tax rate on everyone earning over $200,000 won’t cover the current federal deficit. And, of course that would raise other problems, because, since most state income taxes run around 6% for those making over $200,000, a 90% federal income tax would bankrupt all but those millionaires making more than $5 million annually.
Given a $1.4 trillion annual deficit, and the lowest tax rates in more than 70 years, the Republican alternative of continuing lower taxes and slashing federal programs doesn’t seem terribly workable, either, since to balance the federal budget would require cutting roughly 30% of all federal programs…which would translate into cutting more than a million jobs at a time of high unemployment… and given the fact that many of those programs can’t be cut without a massive overhaul in government, either way, neither side makes much sense.