Taxes, Inequality, Debt, and Deficit

A September 2015 report from the Brookings Institute demonstrates that significant increases in top marginal tax rates would have minimal effects on both income inequality and the federal budget.

This report was prepared by William G. Gale, Melissa S. Kearney, and Peter R. Orszag. It should be stressed that Orszag was Pres. Obama's director of the Office of Management and Budget and a former director of the Congressional Budget Office. Nobody can claim Orzsag is a conservative or libertarian — he is an excellent analyst.

Read the report here:

http://www.brookings.edu/~/media/research/files/papers/2015/09/28-taxes-inequality/would-top-income-tax-alter-income-inequality.pdf

A larger hike in the top income tax rate to 50 percent would result, not surprisingly, in larger tax increases for the highest income households: an additional $6,464, on average, for households in the 95-99th percentiles of income and an additional $110,968, on average, for households in the top 1 percent. Households in the top 0.1 percent would experience an average income tax increase of $568,617.

How would these reductions in after-tax income affect overall income inequality? To answer that question, we calculate the Gini coefficient on the full distribution of post-tax income under the three different tax policy scenarios. (The Gini coefficient is an index that ranges from 0, if everyone had the same earnings, to 1, if a single person had all the earnings and everyone else had none.)

Perhaps surprisingly, increasing the top marginal tax rate [from 39.6] to 45 percent or 50 percent has a trivial effect on overall income inequality. This can be seen in Table 1 below. Under current tax provisions, the after-tax Gini coefficient is .574. This compares to a Gini of .610 calculated over pre-tax income. Raising the top income tax rate to 45 percent reduces the Gini coefficient only from .575 to .573. Raising it to 50 percent brings the Gini to .571. If the 50 percent top tax rate is applied to income only above $1 million for married filers and $750,000 for single filers, the resulting Gini is .572.

Statistically, the results are insignificant in reducing income inequality. Raising taxes might feel good, but it accomplishes little. More importantly, you cannot really raise taxes on the highest earners and then cut lower-income taxes because doing so would not improve the fiscal situation of the United States.

The federal government is broke. Beyond broke. As of the moment I'm writing this post, these are the dark facts of U.S. finances:

Debt as of Nov. 12, 2015: $18.6 TRILLION

Deficit for 2015 (to date): $433 BILLION ($426 billion was forecast in 2014. Ooops)

But raising the taxes on the rich to a 50 percent rate? That would raise only $95.6 billion, not even a quarter of the deficit. Forget any new spending. The tax increase would likely have no net effect, either, because generally Democrats and Republicans call for lower taxes on the middle and lower-income brackets to accompany higher taxes in the upper brackets. If anything, we tend to increase the deficit when making adjustments to rates and tax breaks for the first four quintiles.

Here are the numbers from the Brookings report:

Increasing the top rate to 50 percent with the same redistribution scheme would bring in an additional $95.6 billion in revenue, leading to an additional $2,650 in post-tax income for the bottom fifth of households. Applying a new top rate of 50 percent to income above $1 million for married filers and above $750,000 for single filers would bring in an additional $63.5 billion in revenue, which would result in $1,760 in additional post-tax income for households in the lowest quintile.

It isn't that we shouldn't adjust taxes: someone has to pay for the debts of this nation. But the point is that we are so broke that only cutting spending would have a significant effect on the debt or deficit.

Assuming you did increase the top marginal rate to 90 percent, you might (and only might) raise up to $160 billion per year, assuming the wealthy only exploit a minimum of loopholes (good luck with that assumption). That $160 billion? That would not come close to balancing the annual budget in its current state.

The only way to balance the budget? Grow the economy, cut spending, and raise some tax revenue. Nobody will like all the steps needed to achieve all three of these. Not me, and not my progressive friends.

We don't need a truly balanced budget, but we should aim for a much smaller annual deficit and a significant reduction in the overall debt. In my view, and that of many macroeconomists, the federal debt should be half or less of U.S. gross domestic product (GDP), or about $6 to 8 trillion at this time.

Unfortunately, our national debt now exceeds the GDP of the nation. We owe more than the entire economy generates in a year. That's a very sorry state of affairs, caused by a public that doesn't want to pay for the largess we demand from government and our various international exploits. (Surprisingly, our military spending is only 19 percent of the overall federal budget, including non-discretionary spending, and most is for personnel-related costs.)

Raising taxes, it seems, does little to address inequality, debt, or the annual deficit.

We should be ashamed, since we the voters helped create this mess.

In my now ancient post from 2011, The 90 Percent Tax Rate Myth [http://almostclassical.blogspot.com/2011/03/90-tax-rate-myth.html] I attempted to explain that 1) that marginal rate was an illusion (much less any effective tax rate) due to the number and types of deductions allowed and 2) it wouldn't make much difference to the federal budget.

Since 2010, I've explained "the rich" couldn't pay for much of anything; not even a few months of government services if we confiscated all their wealth. See Taxing the Rich vs. Reality
[http://almostclassical.blogspot.com/2010/11/taxing-rich-vs-reality.html] and this great YouTube video, Eat the Rich [https://www.youtube.com/watch?v=661pi6K-8WQ].