Can the US Tax Its Way Out of Debt?

picture of moneyEvery so often I’m confronted with this thought pattern. Each time I am, I shake my head and think do I really have to do this again? I’ve done this so many times before that the imprint is seared in my mind. But, as optimists are wont to do, once more into the breach.

A person who shall remain nameless commented on a post I made on a social media platform that shall also remain nameless. Why nameless? Because I don’t seek to embarrass or defeat someone in intellectual battle. I’ll simply use this as my foil to once again try desperately to educate the masses.

Here’s what “he” wrote. (I put he in quotes because on social media you have no way of knowing the sex of the person behind a nom de plume.

Our deficit is as massive as it is because of steady Republican tax cuts since Reagan. Of course, taxes have to go back up if we want a functioning country.

When I responded that he had it backward, he responded with this.

We won’t have a functioning society if spending goes down to match income. Income needs to increase to match need.

There are lots of political issues here, but I’m going to avoid them.. I’ll only point out a couple of things. In his first response, he blamed the deficits on massive Republican tax cuts. In the second response, he said income needed to increase to match need – not to balance the budget. So, his concern appears to be more related to government “helping” people than it is to a balanced budget. That’s precisely what’s gotten us into the mess.

But his comments bring me to my point. It is literally impossible to tax our way out of debt. Let me explain why.

According to Forbes’ America’s Richest Billionaries, Jeff Bezos is worth $113 billion. Bill Gates follows him with $98 billion. The others are Warren Buffett, $67.5 billion, Larry Ellison, $59 billion, Mark Zuckerberg $54.7 billion, Jim Walton, $54.6 billion, Alice Walton $54.4 billion, Rob Walton, $54.1 billion, Steve Ballmer, $52,7 billion, Larry Page $50.9 billion, Sergey Brin, $49.1 billion, Michael Bloomberg, $48 billion, Charles Koch, $38.2 billion, Julia Koch and family, $38.2 billion, Mackensie Bezos, $36 billion, Phil Knight and family, $29.5 billion, Sheldon Adelson, $26.8 billion, Jacqueline Mars, $24.7 billion, John Mars, $24.7 billion, and Elon Musk, $24.6 billion.

Together, the twenty wealthiest billionaires in the United States are worth an impressive $998.7 billion dollars. Almost a trillion. Do you know how much the interest on the national debt is? $378 billion. Do you know how much the federal government spends annually? $4.829 trillion.

So, if we were to confiscate the entire fortunes of the 20 wealthiest billionaires in the US, we could pay the interest on the debt for 2.64 years. Or, we could fund government spending for about one quarter.

However, since we’ve stripped them of all their wealth, we can only do this one time. The second twenty won’t provide near as much money, so we’d rapidly be confiscating all the wealth of millionaires. And pretty soon, everyone would be destitute and there would be no wealth left to confiscate. The government would own it all, but there would be no one to purchase it (except foreigners) so the government could obtain the cash it needs to operate.

What does the US collect from taxes? According to the IRS (they’re a bit behind – their most recent info is for 2017), $3,387,690,000,000.. . But only 54.47% of that comes from individual income taxes. In order to close the gap between spending and income, the US would have to collect $1.442 trillion more in taxes. Currently, individual income taxes account for $1,838,403,000, so those taxes would almost have to double to make up the difference. Corporate taxes are $338,529,000,000, so they would have to increase by a factor of 4. IOW, corporations would have to pay five times as much in taxes as they do now.

income tax share by bracket

As you can see from the chart above, the bulk of the income taxes are not collected from the wealthy. There simply aren’t enough of them. And after you get past the first twenty billionaires, the income drops off drastically. There are 20,223 returns reporting income of $10,000,000 or more. (That’s 0.0061% of the US population.) The taxable income on those returns is 541,911,101,000. Enough, if we took every dime they earned, to pay the interest for less than two years. Enough to fund the government for less than two months.

So the billionaires and millionaires are not going to save us. We’ll have to look elsewhere.

tax share by income bracket

BTW, to be in the top 50% of wage earners, you must earn more than $33,048 annually (just in case you thought that was only rich people.)

There were a total of 152,903,231 returns filed in 2017 reporting a gross income of $11,009,900,155,000. Of those returns, 103,718,925 had taxable income. That taxable income amounted to $7,857,396,108,000. The government is spending 61% of that annually!

When a government is spending 61% of the annual taxable income of the entire nation, something is terribly wrong. In order to balance the budget, the government has to tax its citizens an average of 61% of their taxable income. Based on the numbers above taxable income is 71% of your gross income (on average). So, if you earn $50,000 annually, your taxable income would be $35,500, and your taxes would be $21,655, reducing your spendable income to $28,345.

Note: I’m getting all these numbers from the IRS spreadsheet, which will be downloaded if you click on this link.

But you already pay 6.2% of your income in social security taxes. So, while your total tax bill would be $21,655, $3,100 of that would be taken out for social security. (SSI is supposed to be a separate “trust” fund, but Congress ignores that and the money collected goes into the general fund.) So, your tax bill at the end of the year would be $18,555. So, to avoid having to write a check, you would need to have withholding taxes of $1546.25 each month from your paycheck.

Your monthly income would be $4,166.66. $258.33 would come off the top for SSI, and another $1546.25 would come out for withholding. Your take-home pay would be $2,362.09. Your spendable income would be 57% of what you earned.

Does that sound politically feasible to you? Are you willing to make that sacrifice to balance the budget? Perhaps you might be until you think about this.

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To look at the impact of marginal tax rates (as a proxy for all taxes) on budget deficits, I created two charts. The first shows marginal tax rates from 1960 to 2020 based on this page. The second shows the budget deficit/surplus across the same years based on this page.

marginal tax rate graph

Budget surplus/deficit by year

You can download the spreadsheet here.

As is clear from these two graphs, budget surpluses or deficits have little or no relation to marginal tax rates. The driving factor behind budget deficits is spending. Until spending is brought in line with income, that will never change. In 1999 and 2000, for the first time since 1960, we had budget surpluses. Why? Not because tax rates changed. (They didn’t.) But because spending changed.

Spending is driven by what politicians think they can get away with. As long as we let them get away with it, they will continue to spend and spend and spend regardless of how much income the government receives.

It quickly becomes apparent that we cannot tax our way out of this problem. There simply aren’t enough people in the United States earning enough money to fund the government, even if we took the bulk of their income. And confiscatory tax rates have already been proven to depress earnings and send the wealthy to tax havens, losing their tax dollars completely.

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