Friday, July 29, 2011

How High Would Taxes Have to Be to Close the Budget Gap This Year?

Many on the left try to make it seem as if our deficit problems are coming from the tax side, if we just made the rich "pay their fair share" we can solve our budget problems. After reading Brian Wesbury's piece in today's Daily Caller, in which he argued that there simply aren't enough rich people to solve our budget problems (and the middle class would likely be hit by higher taxes if we don't cut spending), I decided to look at the IRS data and calculate exactly how high would the tax rates have to be close this year's budget gap of around $1.6 trillion (it's $1.65 trillion according to the White House and $1.55 trillion according to the CBO). What I found was certainly not surprising but still quite disturbing:

One thing to note is that I am using 2008 data (the most recent available) and so the gross income numbers this year are probably lower, meaning the effective tax rates would have to be higher (scary thought isn't it?). I am also calculating the effective tax rate on total gross income not just taxable gross income, so I am assuming certain types of non-taxable income is taxable, including interest from tax free municipals.  And finally these are effective tax rates (i.e. money actually collected from the government), after all deductions so that statutory tax rates would likely be much higher.

As you can see, we can't even come close to balancing the budget by taxing "millionaires and billionaires". Things are so bad that we would have to make everyone making over $75,000 per year to give almost half their total income to the Federal government in order to balance our books. And even after that they wouldn't be home free as they would still have to pay state and local taxes. And can you imagine what these tax rates would do to our economy? I'm not sure we'd even have much of an economy left after hiking tax rates this high.

This is why we HAVE to cut federal spending as soon as possible. The longer we wait, the harder it is going to be.

Update:   So I made a bit of a calculation error in the original table which overstated the tax rates on total adjusted gross income (I used the wrong denominator in the formula).  I've corrected it, so the rates needed to balance the budget are a little lower.  Instead of effective tax rates having to be around 40% for everyone in the economy, they now only have to be about 31%, or about 2.5 times higher than effective tax rates are now.  Sorry about that, I just realized my mistake on the commute home.

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