Part VII

Hello again! For today’s installment we will look at a theory that is popular among Liberals, and that is to tax the rich more. I will need to do some more estimates on this one because like with the corporate tax data, I do not have access to the detailed 2010 income tax figures as they have not yet been published by the IRS yet (the most recent year published for income taxes was 2008). But income taxes were a little simpler to figure out as deduction and tax credit rates do not change much from year to year and the tax rates did not change from 2008 to 2010. So assuming the break down of percentages of who paid income taxes in 2008 did not change much, here is the breakdown of the $898 billion received in income taxes in 2010:

Those who made less than $49,999 a year paid on average 11.7% of their taxable income, which amounted to 109.5 billion or 12.2% of all income tax revenue.

Those who made between $50,000 and $199,999 a year paid on average 16.2% of their taxable income, which amounted to 373.5 billion or 41.6% of all income tax revenue.

Those who made more than $200,000 a year paid on average 25.7% of their taxable income, which amounted to 419.3 billion or 46.7% of all income tax revenue.

For my analysis I am going to consider anyone who makes more that $200,000 a year “rich” because these returns only made up about 5% of all tax returns in 2008, so I figured that if you made more money that 95% of the tax payers that was a good indication of being pretty well off.

To cover the national deficit in 2010 we would of had to raise income taxes on the top 5% of wealthiest Americans by 400% or in other words we would have to increase the top three tax brackets from 28%, 33% and 35%* to 112%, 132% and 140%. Since it is mathematically impossible to tax someone at a rate higher than 100% that means that we cannot balance the budget based on purely raising tax rates on the rich. Even if we rewrote the tax laws to eliminate all deductions and tax credits for those who made more that $199,999 a year it would be impossible because you would need to tax the income of the rich at a rate of 102%.

So balancing the budget by taxing the rich was not possible in 2010 but what would a tax hike on those who make more than $200,000 accomplish? A substantial tax increase of 33%, or other words about 34.1% of their taxable income after tax credits would decrease the federal deficit by $136.8 billion or 10.5 percent.

So what is the verdict? Without a major over hall of the tax code, a tax hike for the rich cannot balance the federal budget and even a higher tax increase of 33% would only make minor gains on balancing the budget.

By the numbers:

Percentage this idea could reduce the federal budget deficit by: 10.5%

Total dollar amount this idea could cut the deficit by: $136.8 billion

*There is an interesting discrepancy to note here. How is it that the rich pay on average 25.7% of their taxable income but the top tax brackets are 28%, 33% and 35%? There are two reasons and they both have to do with current tax law. First is partly because the way tax brackets work and secondly it is mostly because how capital gains (money made from stocks, bonds and interest-bearing accounts) are taxed. I will go into this in more detail in my “flat tax” section.