Will Taxing the Rich Alone Solve Our Fiscal Challenges?

Every once in a while the idea of fixing all our fiscal problems by taxing the top 1% of the population is proposed, but it’s time to do the math and see if it’s true.

The Committee for a Responsible Federal Budget put out a report a few years ago, prior to the latest spending due to Covid-19, where they analyzed what it would take to actually balance the budget.

The first scenario looks at balancing the budget by not adding any more to the existing debt. The challenge with this scenario is that the interest on the existing debt will crowd out other expenses in the federal budget over time as interest rates rise in the future.

In order to balance the budget of the federal government by increasing taxes on only the top marginal tax bracket, they would have to increase it to 102%. Everything earned over $400,000 would be taxed at 100% and then some.

When they looked at how high tax rates would have to go if they included anyone that made more than $250,000 a year, the tax rates would have to be 90%. If they went down to $150,000 a year the tax rates would be around 80%.

When the committee looked at increasing everyone’s taxes to balance the budget over 10 years, taxes would have to go up to 49% across the board. If you think that you stay in the 24% tax bracket and not be affected by the current fiscal situation the math isn’t looking good.

What if the government didn’t want to balance the budget but just maintain the current deficit? The top tax rate would have to go up to 60%, or if applied across the population no matter how much they earned, everyone would have to pay a 42% tax rate.

Our fiscal condition is more dire now due to Covid-19 so these numbers aren’t drastic enough. The moral of the story is that our current financial crisis is irreversible and can’t be solved by just taxing the rich, the only solution is to broaden the tax base.

When you confiscate 100% of what people make you encounter the Laffer Curve. At whatever the cut off point is those people will just stop working and you will ultimately kill the economy.

You also need to keep in mind that when a politician talks about taxing the rich today, they are talking about using that money to fund another program, not to deal with the debt crisis.

Taxing our way out of the problem isn’t going to work very well, even if we taxed everyone in the country and spread the burden out, let alone just by taxing the rich. You are not immune to tax increases just because you’re not in the top 1% in terms of wealth.

 

Mentioned in this Episode: Can We Fix the Debt Solely by Taxing the Top 1 Percent? https://www.crfb.org/blogs/can-we-fix-debt-solely-taxing-top-1-percent