I’m trying to get some idea of just how much money people are arguing about when it comes to raising taxes.
Thanks to bad mushrooms served at a state dinner and a bizarre case of mistaken identity, you have been tasked with fixing the US budget problems. You have complete, unilateral control over all US federal tax rates, including social security, medicare, etc. Spending, however, will remain unchanged at its current level, and will grow at the currently projected rate. That responsibilty was given to a tapir, and he decided to leave things exactly as they are. Then he bought a first class ticket to Malaysia and disappeared into the jungle.
Your fixes must work permanently, so no funny stuff with sunset clauses or other tricks to just push the problem down the road. Also, they just made it a capital crime to bribe you, or the tapir, so don’t even think about selling your power to the highest bidder.
Let’s say I’m near the bottom of the 1% which, according to something I heard on NPR yesterday, means my annual household income is at least $506,000. That’s a lot of money for one person to make, so let’s assume I’m an engineer and my wife is a doctor, and that is a combined income figure.
How much do our household taxes need to increase in order to fix the US government’s financial problems for the foreseeable future?
What about somebody making $100k or $50k; how much more will he have to pay?
Let’s take one scenario: letting the Bush tax cuts expire.
In rough figures, if a family made $500k in taxable income in 2000 (note of course that not all income is taxable), they would have paid about $170k in Federal income taxes. Currently, they would pay closer to $145k. For a family making $50k, in 2000 they would pay roughly $8,100 in taxes; in 2011, they would pay $6,600. For $100k, it’s $22.3k in 2000, and $17.2k in 2011. Play with the numbers here… keep in mind that everyone’s tax bill will be different because given equal incomes, people will qualify for very different deductions that can have significant effect on their taxes paid.
This would not completely balance the budget, but it would substantially reduce the deficit. See figure 1.
I don’t have the tables in front of me, so I’m not giving you a complete answer. But there are multiple concerns:
We are just not pulling in enough money to meet our present spending, let alone pay back the debt to the Social Security fund.
In order to spur economic growth, we may want confiscatory taxes on corporate profits and marginal income brackets, with exemptions for various kinds of spending, such as those that increase hiring.
After decades of using the payroll tax to fund the government, the poorer half of us have lost their savings, or even ability to save. We probably should move Social Security funding to a less regressive basis.
So.
The $50K guy will be pretty close to where he was, because deadweight loss on the needs of the working class is counterproductive. The $100K guy can take a bit of increase though.
Ballpark, if your $506K salaries are already taxed as normal income: You might see a 5 - 10% hike on your marginal income above a given line, maybe $60K or $100K, and another 5 - 10% on income above another line, maybe $300K or $500K. But long-term capital gains may be taxed at the rate of normal income, so that’d be a hike.
But the OP misses a key point. It’s not the salaried professionals that have to take the biggest hike. It’s the bond investors. And if we start to buy back the present debt by issuing fewer new bonds, they’re going to get the double whammy. The government will ask more in tax from them, & offer less chance for bonds backed by [del]taxes[/del] more bonds.
On the other hand, they’re still be richer than you, so don’t sweat it too much.
It’s not just that we have a current deficit of $1.6 trillion per year. Suppose we raise taxes enough to pay for all of that. We have not addressed the rest of the growth in mandatory spending proposed.
According to my rough calculations you would have to raise taxes on everyone another 15% to balance the budgets after the Bush tax cuts expire. So the top earning couple would pay another 75K bringing their total from 145K to 245K. The couple making 100K would pay another 15K bringing their total from 17K to 37K and the family making 50K would pay another 7.5K taking them from 6.6K to to 14.1K.
If you wanted to start paying down the debt you would have to raise more.
Shodan is correct that tax hikes alone are not the long-term solution, which is why nobody has proposed solving the deficit problem with tax hikes alone. Obama’s proposal was roughly 3-to-1 cuts to revenue, and other various Democratic proposals are similar.
What is required is means-testing SS benefits (while moving to chained CPI, and perhaps raising the maximum contribution), tax increases (either through tax expenditure reduction or rate hikes), and allowing the health-care reforms to go into effect in 2014 and observe any changes in the cost curve (IPAB in particular wrt Medicare expenses).
Getting revenues back to Clinton-era levels (roughly 19% of GDP) from their current levels (roughly 15% of GDP) has to be part of the solution, especially considering the political reality that is the wide-spread popularity of the main deficit drivers.
Correct me if I’m wrong, but the present federal budget is only about 25% of GDP. Even throwing in state budgets, governments spent between 40% and 50% of GDP before the crash. That’s not the taxes, that’s the total spending. We’ve taxed almost that much all along, of course. Except when certain politicians decided to play Santa Claus.
Going from taxing 15% of GDP to 25% of GDP is not a nosebleed.
Which is a proportion I would say is roughly correct.
Agreed. Means-testing for SS especially, and a removal of the cap altogether. Social Security is a regressive tax, but it is also quite popular. Removing the limit would be a politically possible way to raise revenue.
I am not sure Obamacare is going to help much. IIRC, much of it is funded by cuts to Medicare, which are unlikely to survive no matter which party controls Congress. And preventative care does not generally save money, so the idea that people will have insurance so they won’t wait until it is too late and expensive to seek treatment is probably not going to work out.
Part of that is just getting past the current slowdown in the economy, and IMO resisting the urge to spend money to “fix” unemployment. Unemployment is going to be one of the last things to recover. I have even read economists who describe employment as counter-cyclical.
Best-case scenario might be that Obama gets re-elected, and Congress ends up in GOP control, or split the way it is now. Then gridlock stops both sides from spending on what they want.
Worst-case is that both sides come together in unity to rescind the automatic cuts under the debt-ceiling deal. Obama has said he will veto that, but we will see if he can resist a deal that gives him more spending along with the usual cuts to balance the budget - in 2017.
Over the last 60 years taxes have reached 20% of GDP exactly once, during the peak of the internet bubble. The historical average is 18.3%. to say that it would be easy to get over a third more revenue as a percentage of GDP is not true.
Here’s a graph of spending and outlays as % of Link.
So, it’s correct to say that spending is 25% of GDP, but that’s the problem. Revenues are only about 15% of GDP, although they have historically averaged about 18%. So, no, we haven’t taxed “almost that much” all along. Going from 18% to 25% would be almost a 40% increase.
I don’t know why they can’t give you an answer. The Congressional Budget Office provides a budgetary and economic outlook that’s updated several times per year. Those figures are based on a growth rate of 2.3% in 2011, 2.7% in 2012, and an average growth of 3.6% from 2013-2016, and 2.4% from 2017-2021. You didn’t ask, but that corresponds to an unemployment rate of 8.9% in 2011, 8.5% in 2012, 5.3% in 2016, and 5.2% in 2021.
Nobody’s saying we don’t. I, for one, would be happy if we cut the entire defense, especially the money for new developments, by half. But the OP suggested that you’re only in charge of tax policy and that spending will remain the same. Given that premise, those making over 106k will see an increase in taxes that is exponentially raised as the profits go up higher.
Forget about allowing the Bush tax cuts to expire, stop them right now.
But it’s not like we can’t raise the money. Government expenditure is not greater than GDP, it’s not even greater than private sector GDP. And the money we raise will go back into the economy, spent by civil servants, uniformed personnel, and employees of contractors.
I’m not convinced. If we only focused on income tax than it’s true spending has to be cut. But couldn’t taxes be tied in a way to adjust upwards with spending? Personally this is what annoys me most with the US system of taxation.
As just one example, consider gas taxes. As a general rule, the more someone uses the roads the more gas they consume. Taxing gas provides increased income along with increased use. If we payed for roads from a 1% income tax, people could destroy the roads faster than we could repair them.
In Canada, certain programs like [un]Employment Insurance is paid for directly from a payroll tax, so there are times when the program is actually flush with cash.
The US federal government is now stuck paying for retirement, seniors healthcare, and the military, all programs that continue to grow year after year. But they’re tied to income, which isn’t going to grow at the same rate.
So you are right in the sense that simply playing around with income tax rates isn’t going to solve the problem. But playing around with where taxes are applied might.
emacknight, you’re not wrong. The problem is the political culture on the right side of the aisle, where practically everyone who started his political career since 1990 is a true believer in always cutting taxes and never raising them. It’s part of the candidate vetting, and it seems not to be going away.