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Some of the stalemate over the Fiscal Cliff has been over whether to raise the tax rate on the wealthy in order to raise additional revenue.

One argument that is frequently made is that the main problem is not revenue, it is the level of spending. More specifically, that no amount of tax revue from the wealthy would be enough to cover the current spending levels.

Is that argument in favor of bigger spending cuts sound? Can it be substantiated with actual numbers?

If you would consider the "wealthy" to be everyone who earns more than one million per year in income or capital gains (which was a cutoff for many proposals over the last two years), could taxing their income at any level fund the current federal government spending? If yes, what would the effective tax rate have to be? If no, what is the most you can fund at 100% effective rate? (assume 2012 revenues and spending).

(Note: No one is asking the rich to pay 100% of their income over a certain level, but this question is about whether the budget deficit is theoretically addressable without major spending cuts.)

NOTE: I'm not looking for discussions over whether such taxes are fair or not. Merely how the two numbers compare. The answer should consist of the following numbers:

  1. Current federal spending deficit for 2012 (revenues - spending)

  2. Total income of those earning $1mil + for a year

  3. If #1 < #2, what % of #2 is #1?

  4. If #1 > #2, what amount and % of deficit is not covered?

To be clear, the "deficit" discussed here is the annual deficit, not the total federal debt.

NoDataDumpNoContribution
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user1873
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    This questions is simply rhetoric. Nobody is asking the "wealthy" to pay 100% of their income in taxes. If you're asking about the cost of running the government, get specific about the budget numbers you seek. But beyond that, this type of grandstanding isn't really what this site is about. – Robert Cartaino Dec 21 '12 at 01:45
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    @RobertCartaino, indeed no one is. But an argument is being made that they aren't paying their fair share, and that is why we are going over the Fiscal Cliff. If spending is actually the issue, then it will be clear from the fact that confiscating 100% of the rich's income over one million is still not enough to pay for our current.spending levels. No one ever provides a figure for what a fair share would be, so if 100% won't do it, that should be proof enough. – user1873 Dec 21 '12 at 02:45
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    This column indicates that it would only address 1/3 of our current spending (and that is taking all their income, not just income over one million. It doesn't source its calculations, so it would be nice to see if this was CBO numbers or some other source. – user1873 Dec 21 '12 at 03:40
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    @RobertCartaino - I'm sorry but I completely disagree. The answer to this question (assuming the answer I read is correct numbers wise) is 100% relevant to a debate over whether the spending needs to be cut. The answer to this question is 100% supported by facts and references, and nobody is likely to debate math. Frankly, I feel that closing it as "non-constructive" is a complete abuse of what "non-constructive" means. just because you don't like the implications of the answer doesn't make it a bad question. – user4012 Dec 21 '12 at 12:39
  • @RobertCartaino - BTW, I trimmed the question down and spelled out exactly is being looked for. – user4012 Dec 21 '12 at 12:57
  • Also problematic is that none of the proposals on the table attempt to completely balance the budget. At best the most aggressive ones simply slow the rate that we get deeper into debt each year. – JohnFx Dec 21 '12 at 20:19
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    @RobertCartaino I support the question, as re-stated, because it helps reach through political rhetoric to facts. If this site can gather Q&As which do that, I think it will be doing a great service. – Jim DeLaHunt Dec 30 '12 at 00:51
  • I always wonder what this mystical "fair share of taxes" terminology is defined as... – Gup3rSuR4c Jan 01 '13 at 22:13
  • @RobertCartaino "nobody is asking the wealthy to pay 100%" Unless the nation is fighting a war. One has to wonder just how many wars America would have gotten into if the constitution said taxes have to go up to pay it off. That'd be a tad more reasonable fiscally as well. –  Jul 06 '16 at 15:31
  • Good question. Of course the argument is a bit tricky, even if something is not enough to reach a goal it might still go a long way to achieve it. It would only be an argument for additional spending cuts (or defining wealthy already at a lower income limit), not an argument against taxation of the wealthy. – NoDataDumpNoContribution Jun 16 '19 at 07:18

3 Answers3

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Point by point.... (all numbers for FY2012 unless otherwise stated)

Total Revenues -- $2.469 trillion

Total Expenditures -- $3.590 trillion

2012 Budget Deficit - $1.121 trillion

(Above numbers are from the OMB)

From the IRS raw data:

Year -- Total income for those grossing over $1m -- Total taxable income over $1m

2007 -- $1.401 trillion -- $1.008 trillion

2008 -- $1.076 trillion -- $754 billion

2009 -- $726 billion -- $490 billion

We don't have hard IRS data for any year after 2009, which was the worst year in the recession, so this is not a great yardstick.

However, looking at the economy as a whole (real GDP) year-to-year from the BEA

2007 -- $13.33 T

2008 -- $12.88 T

2009 -- $12.87 T

2010 -- $13.18 T

2011 -- $13.44 T

2012 -- $13.89 T (assuming 2% growth in Q4)

Based on these numbers, the answer is, "probably not."

Even if personal incomes return to 2007 levels, there is not enough income in the over-1-million bracket to cover the current deficit for FY2012. Total GDP is higher than in 2007 but that doesn't tie directly to personal income, and there would still be a $100B deficit at 2007 levels.

Another interesting point from these numbers is that the last year a 100% tax on income over $1m would have balanced the budget was 2007, when the deficit was around $160B.

Jim DeLaHunt
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JNK
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  • offtopic: Is IRS in general on 2 year lag reporting, or is there something special about 2009? – user4012 Dec 22 '12 at 00:06
  • I think its normal. FY2009 returns were filed all through 2010 and this is pretty detailed breakdown info that would take a while to aggregate. – JNK Dec 22 '12 at 00:39
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    Subtracting out the portion of that ~ $1 trillion that they already pay in taxes, and the answer changes from "probably not" to "certainly not". – Ben Voigt Oct 01 '13 at 18:03
  • @BenVoigt With a taxable income of $1t (2007) or half that (2009), they definitely pay much less than $1t in taxes. Although you are right that what they do pay should be deducted from the calculation. – Evargalo Jun 14 '19 at 14:14
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    Just out of curiosity, could the calculation also be performed for other definitions of wealthy, say half a million per year. Or could capital incomes be included. Are capital incomes included? – NoDataDumpNoContribution Jun 16 '19 at 07:20
  • This being IRS data, does that means this is declared income after any off-shoring or other reduction methods are applied? – Jontia Oct 26 '21 at 06:46
  • The missing link here is what counts as income. To accomplish this goal you would have to make lots of things that aren't currently income into income. The way that the federal government monetizes taxation on income that is not currently classified as income is in its "Tax Expenditure" list (most, but not all of which is heavily tilted to the high end of the income distribution). https://home.treasury.gov/policy-issues/tax-policy/tax-expenditures Collectively, this involve something like $800 billion a year of tax that would be collected in the absence of these tax breaks @ current tax rates. – ohwilleke Jan 04 '22 at 22:40
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When you ask for how much will the tax rate have to be for rich people to wipe out the budget, you're most likely to be presented with a How Much is a Million?, Lies, Damn Lies, and Statistics Edition.

The reason for this is because "taxes on the rich" can be defined in a lot of ways, such as making arbitrary cutoffs on who's rich and only counting certain types of taxes, such as personal income tax, payroll tax, corporate tax, capital gains tax, estate tax, etc.

That being said, The deficit is to the point now, where if you actually want to cut it, you're going to have to BOTH raise taxes AND cut spending. Either/or is just not going to cut it.

Sam I am says Reinstate Monica
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    Please keep comments focused on improving the post and try to not to turn comment threads into miniature chat rooms and debates. Thanks. – Robert Cartaino Dec 24 '12 at 14:37
  • The link re-writer is blocked on my network. Could you give a more standard form of referencing or provide a less commercial link? – LаngLаngС Jun 16 '19 at 12:59
  • @LangLangC It's a children's book. you can google it. – Sam I am says Reinstate Monica Jun 16 '19 at 15:20
  • I have. But cannot be sure to have arrived at the right one because of the "Lies"allusion. And the comment is meant as a suggestion to not make an advert for a selling intermediary, blocked anyway, but to give readers a way to follow up the link you tried to give. Please excuse me for having missed very probably any intended humour and sarcasm if it is the Schwartz book. – LаngLаngС Jun 16 '19 at 15:28
  • @LangLangC Another bit of background you might be interested, is that "Lies, damn lies, and statistics" is a famous quote attributed to Mark Twain, that is about how you can shape true statistics to appear to support almost any idea you want. – Sam I am says Reinstate Monica Jun 16 '19 at 21:44
  • @LangLangC The link is "commercialized" by Stack Exchange. That is the standard way of referencing on Stack Exchange. That said, if you take the ID from the link (the 0688099335) and put it into the search box on Amazon, it will take you to the right page. You can then compare the ID in that link to the one from this link to verify. I think that's also an ISBN (for books, the ASIN is usually the ISBN), so you could use it at a library as well. – Brythan Jun 16 '19 at 23:29
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The base answer is a simple "Yes". How to get there is a source of endless debate. For a rough answer, we can look in: List of countries by government spending as percentage of GDP

Seems all government spending in the United States of America adds up to about 45% of GDP. Yes, we are entirely capable of balancing the budget.

As a side-note, a few percent of that is money paid to rich people (as interest), which is ... weird.

The civic and economic context of the United States is maintained by government. That context has costs. If you derive wealth from that context, then you should pay a share of the costs.

As most of the wealth in this country is captured by rich folk, any vaguely fair scheme will collect from rich folk. There are many different answers for how to collect. The question did not ask how.

Again, the base answer is "Yes", we can balance the government budgets.

Preston L. Bannister
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