A Tax Tale

It’s been a while since I posted anything on this blog. I have been trying to be more actively involved in politics in the meantime but the candidate I was trying to help was soundly defeated in the recent congressional elections so maybe I should stick with writing in a blog.


There is an old wives tale that has been circulated by conservatives for some time now concerning the tax structure and federal deficits. There are many versions of this tale but the gist of the story is that it is impossible to fix the deficit problem by taxing the rich. Neil Boortz is very fond of this particular tale and likes to quote numbers that profess to prove that raising taxes on those that make $250,000 will make a very minimal difference as far as the deficit is concerned. I have often heard him and others say that if we took all the money that these people earned in taxes it would not fix the deficit. The tactic they usually undertake to prove this point is by breaking down what the government spends per day and applying this increase to this figure. This involves a classic bait and switch analogy in that they start out discussing the deficit and then either devolve into discussing debt or government total expenditures.


It is worth pointing out at this point the difference between the deficit and the debt. The deficit is the annual amount of money that our government spends over and above the amount of revenue it takes in. The debt is the total amount of money our government has spent over and above the amount of revenue it has taken in. It is important to note that most of the government debt is financed by treasury bills that US companies and individuals purchase but there is also a small percentage owned by foreign governments with China holding the largest percentage of this (about 7% as of June 2012).


The tale I am discussing usually winds up comparing the total debt with the amount of revenue a higher tax rate for the wealthy will raise. The first problem with this argument is that it suggests that nothing can be done to solve the debt issue which is of course a bad place to start any discussion. After all, if nothing can be done about it we may as well not discuss it. The reality is that we must first solve the deficit issue before we can solve the debt issue. In other words, we must find a way to spend less annually than we take in as revenue before we can ever begin to pay down the total debt. As Will Rogers once said, if you find yourself in a hole, the first thing you must do is quit digging. The truth of the matter is that a certain amount of deficit in a country with a central bank is a healthy thing but I will save that argument for later. The point is that we have to find a way to limit deficits if we are going to have a successful economy in the long term.


Perhaps we should start with some real numbers and a brief explanation of why we are currently running deficits. In a national government such as ours with a central bank the deficit is the cushion for economic instability. Since we are currently trying to pull out of the worst recession since the Great Depression it is not surprising that our deficits have been very high since 2008. What conservatives don’t like to talk about is when we starting running deficits again after the Clinton years.


When Clinton left office we were actually running a surplus on government spending. In other words, we were taking in more revenue than we were spending which is the only way we can possibly begin to pay down the debt. During the last three years of the Clinton era we ran a 583 billion dollar surplus. CBO projections suggested that a continuation of these policies would have seen us virtually eliminate the federal debt by 2012.


Then Bush was elected and we started down the path of tax cuts for the wealthiest Americans and immediately turned surpluses into deficits. It is important to understand that we were not dealing with recessions or economic collapse in those years; we were simply giving money away to those who least needed it but were most able to pay for elections. We averaged a 440 billion dollar deficit for the eight years of Bush’s presidency. Crazily enough, we did this by fighting two wars while at the same time lowering taxes. It turns out that Cheney’s comment that deficits don’t matter was an accurate portrayal of Bush’s fiscal acumen.


Obama took office during the worst economic collapse in almost eighty years and we are just now beginning to crawl out of the hole that put us into. What you won’t hear conservatives talking about is the fact that the deficit has actually decreased every years since 2009, even in the midst of this collapse. As a matter of fact the 2013 deficit is projected to be 58% of the 2009 deficit. No one should mistake this as something to celebrate but we are making process.


The recent discussions about tax increases have once again brought conservatives to a fever pitch as they trot this same old wives tale out for our consumption. I heard Marco Rubio, the conservative darling, on Sean Hannity yesterday using a variant on this same tale to describe why he refused to vote yes on the compromise measure just passed. He suggested that there was absolutely no way to raise taxes enough so that we could get the debt under control. Let’s take a look at the numbers and see if he is right.


Another tidbit that the old wives tale tends to look over is the fact that there is another tax bracket above the 250,000 dollar bracket, one that some very wealthy people happen to reside in so by just looking at this one bracket it is much easier to skew the numbers to suit conservative’s fancy. The CBO has a distribution chart available for 2007 that details the number of people in each bracket along with their average income within that bracket. This is interesting information because it is notoriously hard to come up with numbers and dollar figures for the upper tax bracket.


According to the CBO chart, the top 10% for reported earnings averaged 394,500 dollars a year in income. There were 116.9 million of these people in 2007. If we were to raise the tax 15% on just these people to a 50% rate we can do the math and see that we would have increased federal revenue 704 billion dollars that year. This is interesting because in 2007 we actually had a 178 billion dollar deficit. In other words, if we had raised taxes on the upper 10% of income earners 15% in 2007 we would have had a 526 billion dollar surplus that year to pay towards the debt.


According to the same CBO chart, the top 5% of earners that same year averaged 611,200 dollars a year in income. There were 5.9 million of these people in 2007. Using the same increase of 15% on this 5% of the wealthiest Americans we can do the math and see that we would have increased federal revenue 540 billion dollars that year. Subtract the 178 billion dollar deficit that we actually had and you can see that this would have resulted in a 362 billion dollar surplus.


Let’s look at the top 1% of wealthiest Americans. According to the same CBO chart this group averaged 1,873,000 dollars that year in income. There were 1.2 million of these people in 2007. Applying the same 15% increase to this bracket we can do the math and see that we would have increased federal revenue 337 billion dollars that year. This would have resulted in a 159 billion dollar surplus.


This still isn’t the whole story as most of these people make their money from investment and pay at the most the 15% tax rate that capital gains requires (think Mitt Romney and his 13% tax rate). Let’s assume these people actually had to simply pay the 35% rate they are supposed to pay according to the federal tax brackets. This would be a 20% increase in the amount of taxes they actually pay. This would have resulted in a 449 billion dollar increase in revenue and resulted in a 271 billion dollar surplus.


If we actually raised this income group to a 50% tax rate as I have suggested for all the other groups in the top 10% that amounts to a 35% increase in revenue. If we do that math for this we get a 786 billion dollar increase in revenue. This amounts to a 608 billion dollar surplus for that year alone. This is actually almost 5% of our current national debt that can be eliminated by raising taxes on the top 1% of wealthiest Americans for that one year. If we had done this in 2007, the year all these numbers are taken from and every year since we would have eliminated 25% of our national debt by 2012 in principle alone. This does not take into account the interest on the debt that is accrued annually as well which usually hovers between 2 and 3%.


It seems like the multiplying large numbers by small percentages makes for surplus instead of deficit; even if we just do this with the wealthiest Americans. This is not something that you will hear conservatives talk about because many of the talking heads of their movement are in this bracket. However, the numbers speak for themselves and they are even more surprising the further you refine them.


In 2009 a pair of young economists, Thomas Piketty and Emmanuel Saez, did a study concerning the distribution of wealth in this country. Unsurprisingly, they came up with some interesting numbers. They based their numbers on reported tax income instead of random surveys so there is plenty of room to suppose that even the numbers they came up with were underestimated but they paint an interesting picture of how the wealth in this country is actually distributed. Their study gives a clearer picture of a group that has largely been in the shadows of other studies; the top 1%.


For instance the top 1% earners took in 8% or all reported income in 1974. In 2007 they took in 18% of all income. If you include capital gains in these figures the numbers skew even further. Their take jumped from 9% to 23.5% of all income; the highest percentage recorded since 1928.


Piketty and Saez then went further and found that the top .01% earners income went from less than 1 million a year in 1974 to 7.1 million in 2007. This is an average and both numbers are adjusted for inflation to 2007 dollar values. If you dig even further into the data the top .001% now average some 35 million dollars a year in income.


These are quite astounding numbers. Put another way in 1974 the top .01% earners took in 1 of every 100 dollars of income in the country. In 2007 they took in one of every 17, or 6% or our whole national income.


Taking the CBO number and applying them to these smaller categories we can get even more interesting results. If there were 1.2 million in the top 1% then there were 120,000 earners in the top .01%, each making an average of 7.1 million dollars in that year. Applying the same 35% increase it we would have gotten a 298 billion dollar increase in revenue by simply raising the tax rate on the wealthiest .01%. This alone would have given us a 120 billion dollar surplus that year.


Think about this the next time you hear a conservative talking about tax increases. The restructuring of our tax system from 1980 on has all been aimed at increasing both the number of the wealthiest among us and the size of their wealth. They have done an admirable job of sequestering over 40% of the wealth of this country into their pockets. They also have done an admirable job of convincing those whose pockets they stole the money from to vote for their candidates in elections. The old wives tale about the futility of raising taxes on the wealthy is just one example of the logic they like to use. The perception that raising taxes on the wealthy will not help us control the national debt simply doesn't hold up to math but that seems to be a common denominator when you analyze the bedrock principles of conservatism through the prism of reality.