Will Taxing the Rich Fix the Deficit?


Uploaded by LearnLiberty on 02.07.2012

Transcript:
Can we balance the budget by taxing the rich? Let's look at how much Americans pay in
federal taxes compared to their incomes. Accounting for federal income taxes and tax credits,
the richest 5 percent of Americans paid almost 30 percent in taxes in 2009. The 20 percent
of poorest Americans paid negative 1 percent, that is, they received more money back than
they paid in. Some argue that the rich aren't paying their fair share of taxes. Yet the
tax rate on the rich is almost three times the tax rate on all other Americans.
In 2009 the government's budget deficit was $1.5 trillion. Let's see how much we'd
have to raise taxes to balance the budget. We'll start by raising taxes on the rich
by half, from 29 percent to 44 percent. Increasing taxes on the richest 5 percent of Americans
by 50 percent only raises about $400 billion, leaving us with a deficit of $1.1 trillion.
Let's go back to the rich. How much would we have to tax the top 5 percent in order
to raise enough money to balance the budget? The answer is 88 percent. Of course, the average
household in this top bracket earns $300,000, which means that the 88 percent tax reduces
their income to $36,000, making the average rich household worse off than the average
household.
It's true that back in the 1960s, the top income tax rate was 90 percent, but that was
the top marginal rate. After adjusting for the various tax brackets and deductions and
exemptions, people in the 90 percent marginal tax bracket actually paid an average effective
rate of about 50 percent. That is nowhere near the 88 percent we'd need to tax the
rich in order to balance the budget. In addition, in the 1960s there were only about 5,000 households
that earned enough to be in the 90 percent tax bracket. To balance the budget, we'd
have to apply our 88 percent tax rate to almost 9 million households. This means that to balance
the budget we're going to be forced to raise taxes on those earning between $100,000 and
$180,000.
Suppose we raise taxes on this group as well. How high do the taxes need to go in order
for us to balance the budget? To balance the budget, we'd have to more than double taxes
on everyone earning $100,000 or more. This means that a household with two wage earners,
each of whom earns $50,000, would pay an additional $21,000 in taxes annually. The lesson is that
arguing about taxing the rich wastes our time and diverts our attention from meaningful
solutions like cutting spending. The budget deficit is so large that there simply aren't
enough rich people to tax to raise enough to balance the budget.