I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.- Thomas Jefferson.

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Thursday, April 21, 2011

On that Tax Hike for the Rich Folks

By Bruce Krasting 04/21/2011

I was looking at some IRS numbers on who pays taxes to the federal government. This data is from 2008. That was a bad year to look at incomes/taxes. There was a big drop in income due to the recession and market crash. But it’s still useful to look at.

If we’re going to raise any significant amount of new revenue it will have to come from the top 5% of earners. Note that in 2008 the top 5% was anyone who made over $159k. That number has crept up in the last few years. For 2012 the top 5% will be any household income that is in excess of ~$170k. Depending on where you live and how big your family is that is really not so much these days. But it is greater than the rest of the 95%, so that is where the new taxes will have to fall.

Note in 2008 the top 5% (a) earned 35% of all income, (b) paid $600 billion in taxes, (c) paid 59% of all taxes, and (d) the average tax rate was 21%.

I think the AGI revenue numbers are currently running at ~$9.2T (up 10% since 2008). Assume that the effective tax rate is about the same. Now let’s raise the taxes on this group of rich people. How much more should they pay? How does a 50% increase strike you? Changes in the tax code to limit deduction AND increase the top bracket that resulted in an increase from 20% to 30% it would raise an additional $325billion. With a 1.6 trillion deficit that extra money would come in handy, but it only covers 20% of that shortfall.

If the tax rate(s) were to be adjusted so that the poor bastards who are making over $170k get their taxes doubled from 2008 levels it would still only raise $625b, leaving us with a hole of $1 trillion.

The effective tax rate would have to be raised on the entire top 5% to 75% in order to balance the budget. Put another way; if you were lucky enough to earn $200k, your take home would only be $50k. And that number does not include state taxes, property taxes or sales taxes. Basically, you have nothing left.

If you think that the solution is to raise taxes BIG TIME on the uber-rich, think again. The top 1% should have about $1.85T in income in 2012. IF we really sock it to them and nailed them at a 90% effective rate we could cover 1.3T of the 1.6 shortfall. This would imply that the top 1% would be paying 75% of all taxes collected.

I hope that this shows that raising taxes on wealthy Americans does not work very well. Yes, we could technically go the route of Sweden and tax income over $500k at 70% or so. But what might be the consequences?

Question: What should the federal rate on high-income earners be? What rate would you apply to those making ¼ mil a year or more? ½ mil? A cool mil?

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