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.