We really are broke
By D.J. McGuire | Monday, March 14th, 2011 | Policy
There is a new theme emanating from the left these days: America isn’t broke; there’s plenty of money out there being hoarded by wealthy Americans; just get it into the public coffers and all will be well.
Chuck Schumer and Michael Moore have used variations on that theme, but the most intelligent version of this argument comes from E.J. Dionne (WaPo) – and the fact that Dionne’s comment tops the bill for this argument is measure enough of its weaknesses.
At its heart, the we’re-not-broke crowd insists that “the wealthy” have more than enough to balance our budgets (Dionne goes so far as to hint that they can wiped out deficits at all government levels). Two National Review writers (Kevin Williamson and Robert VerBruggen) take issue with that.
Williamson runs some what-if scenarios, and finds that relying on the rich to balance just the federal budget would be a near-impossible feat:
But say we wanted to balance the budget by jacking up taxes on Club 250K. That’s a problem: The 2012 deficit is forecast to hit $1.1 trillion under Obama’s budget. (Thanks, Mr. President!) Spread that deficit over all the households in Club 250K and you have to jack up their taxes by an average of $500,000. Which you simply can’t do, since a lot of them don’t have $500,000 in income to seize: Most of them are making $250,000 to $450,000 and paying about half in taxes already. You can squeeze that goose all day, but that’s not going to make it push out a golden egg.
But like certain other exclusive clubs, Club 250K has an inner sanctum, a special club within the club, the champagne room of socioeconomic status. And that is Club 1: the million-dollar-a-year club. Not the millionaires’ club — lots of the people earning $1 million in any given year do not have $1 million in assets — but, still, a million a year, even in rapidly depreciating U.S. dollars, is not too shabby. But the trouble for liberals is, Club 1 is really, really exclusive: Only 0.2 percent of U.S. households have incomes that high, meaning that there’s only about 200,000 of them. And like Club 250K, Club 1 is bottom-heavy: There are a lot more $1 million men than there are $6 million men. And there are a whole heck of a lot more $6 million men than there are $60 million men.
You want to tax Club 1 to get rid of the deficit, you have to hit each of those 200,000 households with an average tax hike — not an average tax bill, but tax increase — of $6 million. And a lot of those Club 1 households don’t have $6 million in income to start with, much less $6 million left after the taxes they’re already paying.
Every time you raise the threshold for eating the rich, you get a much, much smaller serving of meat on the plate — but the deficit stays the same. The long division gets pretty ugly. You end up chasing a revenue will-o’-the-wisp.
Meanwhile, VerBruggen does some calculations to determine how much taxable income is out there among Americans earning over $200,000 a year. After taking into account what these wealthy Americans already pay in taxes, he ends up with “about a trillion dollars” – or less than Washington’s current deficit this year.
This, of course, assumes that the would-be victims will simply leave their money wide open for Uncle Sam. Don’t hold your breath for that one. Lest we forget, one of the major incentives Americans have for home ownership is that mortage interest is tax deductible while rent is not. If millions of middle-class Americans can understand and use tax avoidance, does anyone really think it will escape the wealthy?
So much for taxing the rich.
Dionne then tries some statistical income envy and the usual Old Keynesian drivel about government spending and the economy; the closest thing he comes to actual data is a discussion of Treasury Bill interest rates. Of course, he leaves out the fact that Treasuries are overpriced (and thus selling at lower interest rates) because (1) the flight to American debt that came with the Eurozone debt crises, and (2) the Chinese Communist Party’s massive T-bill buys, driven not by confidence in the American economy but by the need to artificially devalue the renminbi for the sake of their export platforms.
The same source for the T-bill argument (??Bloomberg’s David Lynch) goes on to note that “tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.”
The problem with that statement is the implication of what “political will” means (in Lynch and Dionne’s case, a tax hike). In fact, the last 60 years have shown that what drives revenue is the economy itself, not tax rates. Thus, if the government wants to raise revenue, it needs recovery, not redistribution – which brings us back to the emerging consensus on the weakness of government spending in this regard and the danger of tax increases.
The Dems are actually revealing their trauma over health care. The no-crisis mantra was what they believe sunk Hillarycare in 1994 (it actually capsized on its own, but that’s a different matter entirely), set in motion Bill Clinton’s tack to the center, and “forced” Obama to ram Obamacare down the American people’s throat.
It also gives them the appearance of optimism and hope amid Republican “doom and gloom.” Yet hope without facts is merely false hope – and voters already let the Democrats know what they thought of that last November.
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Former candidate for Board of Supervisors in Spotsylvania, current blogger, economics teacher, and long-rumored windbag. There are two causes closest to the heart: steering the country away from the social democratic nonsense that is sinking Europe, and convincing the rest of the "rightosphere" that the NBA really is a joy to watch.
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15 Responses to "We really are broke"
Didn’t we go through this in the first few years after the New Deal didn’t work? Just attack those with capital and all will be well?
First rule in a crisis is stability. Provide that, and those with capital are more likely to lend credit. Provide that, and the engines of the free market can start turning again.
Attack capital, and the engine seizes up. Very simple.
Great post (as always), D.J.
Deficit reduction needs to start with entitlement reform. Thats the 800 pound gorilla. After that we can attack domestic discretionary, earmarks, tax breaks, etc.
Sean: what about stability for everybody else?
The country’s great economic step forward, the period where we seperated ourselves from the rest of the world in terms of being an economic super power, was between the end of World War II and the mid-60s.
What were the top marginal tax rates then? What percentage of our workforce was unionized then?
Using an economic crisis created by the Wall Street greed to punish Middle America isn’t good policy and it’s probably not going to be end up being good politics either.
Steve,
I hate to say this, but you are beginning to sound a lot like Michael Moore, and that is not a compliment.
It is true that the top marginal income tax rate in the 1950s was much higher. In fact in 1952 it was 90%. However, that was the rate of tax on the first dollar earned after $300,000. Today the top marginal tax rate is 35% on the first dollar earned after $373,000. Adjusting these figures for inflation, the top marginal rate in 1952 would not kick in today until the taxpayer earned $2.4M.
There is another problem with the “soak the rich” policy that D. J. didn’t mention–income flight. If you attempt to tax high income earners too much, they will simply go away. Tax avoidance, which D. J. mentioned, is only one way to shelter income. A couple of years ago Maryland passed an income tax surcharge for all tax payers earning over $1M. In 2008, the year before the surcharge went into effect, Maryland had about 3,000 such taxpayers. In 2009, the first year of the surcharge, Maryland only had 2,000 such taxpayers. That’s right, one-third of the highest taxpayers in Maryland simply vanished and paid no tax at all.
I’m not sure what the inference is of the percentage of workers who are unionized. As I have pointed out before, the decline in unionized workers in the US is a comparable slope to the increase in median household income when adjusted for inflation. Michael Moore will tell you that household median income is declining. He is lying. You can look it up at the Census Bureau site.
Steve,
That may have had something to do with the fact that we were the only major economy *not* dealt a crushing blow by the war itself.
Besides, the era wasn’t quite the dream time we’d like to think it was. The 1950′s had three recessions.
HisRoc,
I believe that at the federal level, tax avoidance is a much bigger issue than taxpayer flight. That’s why I didn’t mention the latter.
Besides, if the taxable income is outside the IRS’ reach, does it really matter where the taxpayer is?
Well, HR, I certainly wouldn’t ever think that a comparison to Michael Moore was a compliment. He’s the Rush Limbaugh of the left.
However, even a blind pig finds an acorn now and then.
Unions, public or private, did not cause the financial situation we find ourselves in now. But they are the scapegoats that have been chosen to the pay the piper for problems the greed of other people caused.
HisRoc, an excellent post. The larger point you mention is that the rich always have more options with their money than the hoi polloi. I leave aside the obvious other strategy of buying loopholes from the legislature. (SV like other leftists never mentions the Effective tax rate as opposed to the nominal.) In addition as rich Dems regularly demonstrate, political connections foster outright tax evasion. Look at Europe. The rich don’t seem particularly stressed. Do you think rich Italians worry about the tax rates? The Dems know very well that it is the middle class that needs to be hit at 50-60% tax rates to (momentarily) subsidize the Dems (current) wish list.
D. J.,
I don’t disagree with you at all. However, there are those on left who just don’t understand that there is a knee in the curve of taxpayer compliance rates under a voluntary tax system. One of the reasons that Kennedy reformed the marginal tax rates was to improve taxpayer compliance rates and thereby increase Federal revenue overall.
I find it highly ironic that the liberals who want to increase marginal tax rates are the same ones who claim that the rich are able to unreasonably avoid paying any taxes at all. I was glad that you used the term ‘tax avoidance.’ Too many people don’t understand the difference between that and tax evasion.
It is true that at the Federal level income flight is less common. In the Maryland example, I suspect that 1000 high earners simply declared their weekend homes on the Delaware beaches or in West Virginia to be their principal residence while earning their income in DC and still living in Maryland. However, the higher you raise the marginal rates on higher income levels to make Dionne’s numbers work the more likely you will be to force taxpayers off-shore who can actually afford to do it.
Val,
You make a very valid point about taxes on the wealthy in Europe. I lived in Germany for eight years. There is an expression amongst the wealthy on the Continent: “Taxes are outrageous if you pay them.”
Here are some current statistics from the IRS: the top 1% of all taxpayers in the US today earn about 20% of the adjusted gross income reported. But they pay almost 40% of the tax dollars. The bottom 50% of all taxpayers earn about 15% of the adjusted gross income reported. But they pay less than 3% of the tax dollars.
I would think that would be enough progressive taxation for even the most strident liberal.
I recently had my tax returns completed by my tax accountant. The experience was illuminating.
Do you realize that if someone, married with no kids, has significant money invested in the stock market, as long as they keep their income below $86,900 per year they will pay zero federal income tax on the earnings? That is provided they only take the standard deductions and do not itemize (If they itemize, their gross income could be more as long as the net does not exceed $86,900.) This is thanks to the Dubyah Bush tax-cuts.
Actually, if such a person was putting a child through college, they might even qualify for a refund even if they never had a dime with-held from earnings or paid anything in estimated taxes. (Such a person would get more back then they paid in.) This is thanks to the Obama tax-cuts.
Don’t get me wrong, I have been benefiting from this myself. I was doing quite well with my stock market investments right up till that tsunami hit. But I am going to wait for things to settle out, and when it looks like the bottom has been reached? I’m going to double down. The fundamentals of my investments are still sound and I am looking at the deep dip as a buying opportunity. I have $80K left in immediately available business depreciation available to shelter any earnings. All I have to do is keep my total annual earnings to something below $86,900 and all of it comes tax free. Don’t even have to tie it up in an IRA.
I have a conscience and I feel so guilty. It is so unfair that those who have so much less should have to pay so much more.
Darn it, double post.
Such a person would only pay zero tax on earnings qualifying as long term capital gains. For example, stocks invested in would have to have been held for at least a year before being sold.
Something I learned in the Navy. If you reward something, you’ll get more of it. If you punish something, you’ll get less of it. This is why the military services have awards programs and a UCMJ with non-judicial punishment. Since taxation is a punishment, perhaps we should not tax wealth or income so that we get more wealthy people. Maybe we should tax or punish the non-achievers and thereby get fewer non-achievers. Recently, it was revealed that more than 50% of all U. S. households receive a government benefit of one form or another. It should be obvious to all of us that we’ve been rewarding the takers and punishing the makers.
Little David,
How do you figure?
I am married, no kids. I itemized, married filing separately, below the $86,000.
So if I did the 1040 EZ…I could have come have better?
I have a WELL RESPECTED local accountant & enrolled agent do my taxes.
So…what are you up to?
Something is wrong here.
Sigh.
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