Posted by: Jeff | April 9, 2010

The Limits of Taxing the Rich

When Joe and I did our podcast on the budget deficit a while back, one of our loyal commenters expressed skepticism that levying further taxes on the rich was as fruitless an endeavor as I had suggested. I had been working off the assessments of people smarter than I, and didn’t have the specific numbers on just how much more money we could or could not squeeze out of the over-$250,000 crowd. Happily, Ezra Klein linked today to an old bit by David Wessell on exactly that topic:

Hard numbers and recent history suggest two facts. One, the deficit is too wide to be closed exclusively by raising taxes on “the rich.” Two, “the rich” do have a lot of money, even after the bust, and raising their taxes would raise significant sums without hampering the economy.

Start with some rough arithmetic. The three million or so fortunate taxpayers whom Mr. Obama counts as rich are projected to earn about $27.5 trillion from 2010 through 2019, according to the Tax Policy Center, a Washington think tank, and about $23.9 trillion after deductions. They are projected to pay $7.4 trillion in taxes. That’s 31.1% of every dollar of taxable income, on average.

To squeeze an additional $9 trillion out of these taxpayers would require boosting that to 68.9%. And that assumes these taxpayers wouldn’t find tax shelters to hide their income or work less. There isn’t enough money in the over-$250,000 crowd to stick them with the $9 trillion tab.

Klein adds his two cents:

And this actually makes taxing the rich look better than it is. The deficit that people worry about isn’t the $9 trillion short-term budget deficit. It’s the mega-trillion long-term deficit. To put this in context, the 2009 deficit was 53 percent of GDP. The 2050 deficit is projected to be 350 percent of GDP.

What’s driving this, as you’ve heard at length, is health-care costs and demographic changes. The CBPP has a nice primer if you want to dig into it. But health-care costs and demographic changes are happening way faster than wage increases. There’s no tax regime in the world that can keep up indefinitely.

So, it’s not entirely fruitless. But taxing the rich isn’t going to get us where we need to go, either. Getting back to our podcast, I think the more important point is that, after whatever tax increases we can realistically levy in the rich, the remaining gap in the budget will still be far too large to make up solely with spending cuts or entitlement reforms. Americans’ attitudes towards how much they should reasonably be expected to pay in taxes are just going to have to change. That’s the bottom line.

We need to be talking about taxation as a matter of responsible management for which the country as a whole is accountable. Talking about taxation as a matter of class fairness – which liberals and leftists are prone to do, and which Obama did with his promise to not raise taxes on families making under $250,000 – just encourages Americans to think, “Yeah, we should raise taxes. But only on those people over there.” As for conservative attitudes about taxes and class fairness, the less said on that topic the better.

So yes, we’re going to need to raise income taxes on people making $250,000-plus, reform Medicare and Social Security, severely cut military spending, and continue to reform our health care system so that the costs of care, and the growth of those costs, come back down to sane levels. But we’re going to have to find other streams of tax revenue as well – large ones – and by definition they’ll have to come from the under-$250,000 subset. Personally, though there are alternatives with aspects to recommend them, I still think a VAT would be the smartest way to go.

UPDATE – In retrospect, I should have included this table, which makes a lot of the above points pretty well. Keep in mind that our projected deficit spending for the next ten years is around $9 trillion total. That’s the gap we’re trying to close.

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Responses

  1. I don’t necessarily agree with this statement of yours, Jeff: “Americans’ attitudes towards how much they should reasonably be expected to pay in taxes are just going to have to change. That’s the bottom line.” I don’t see why cutting spending by cutting programs won’t work? By definition, it *will* work…people just don’t want to have to do it. At some point, we’re going to have to realize as a society that we can’t have everything we want.


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