How much would increasing taxes on the top 1% to 1990s levels reduce the U.S. federal budget deficit?

Question

President Obama has talked about raising taxes on the super-rich as one way to balance the national budget. This New York Times opinon piece says:

We can achieve significant deficit reduction simply by asking as much of people at the top as we did during the 1990s.

How much of the deficit would be reduced by increasing taxes on the top 1% to 1990s levels?

NOTE: I'm not trying to see if increasing taxes, taking all factors into account, actually increase revenue. I'm trying to see if there is enough money among the rich to make good dent on the deficit - assuming no negative economic impact of higher taxes.

Answer 1

TL;DR:

No, this is a ridiculously false assertion on the part of both Obama and NYT opinion page (unless you count reduction of deficit of ~3% or at most ~4% in the extreme case as a "significant deficit reduction", in which it would indeed be a true assertion).

The extra taxes imposed on the "super-rich" - meaning $1M income or more - using highest tax bracket under 1995 tax levels - would cover a whopping 2.84% (or $31.87B) of 2012 yearly Federal deficit (based on latest known reported IRS 2010 incomes).

If you also include those less-fat fatcats making between $500K-$1M/year into that - which gets you close to 1% of income earners (~400k+) so it's a valid inclusion given the usual discourse on incomes - you don't win all that much extra - total of 3.25% (or $36.39B) of 2012 yearly Federal deficit.

Calculations below:

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• 2012 Budget Deficit - $1.121 trillion (OMB).

• 2010 Total taxable income (Src: IRS, "Table 1.4 All Returns: Sources of Income, Adjustments, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2010"), section "Taxable Income":

  • $500,000 under $1,000,000: $309B (cell FO24)
  • Over $1m - ~$801B (Cells FO25-FO29)
  • Total $500,000+ = $1110B
  • They came from 542,635+279,600 = 822,235 returns (cells FN24-FN29).
  • Long-term capital gain/losses were ion cell AW44-45 and AY44-45. See second spreadsheet below.

  IRS doesn't have later years' data yet, so we will use 2010.

• Tax Brackets, adjusted for inflation, were (src):

  • 1995 - highest tax bracket was 39.6% for ($388,350+ for all)
  • 2012 - highest Tax bracket was 35% ($388,350+ for all)
  • 1995 - Long term Capital Gains tax topped out at 28%
  • 2012 - Long term Capital Gains tax topped out at 15%

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Let's do the calculations:

• First, we calculate the income made by those "super-rich" (million+ income) which is NOT under the highest tax bracket changed (before $388,350): 279,600*$388,350 = $108.52B
• Then, we calculate how much income fell into highest tax bracket: $801B - $108.52 = $692.48B
• Then we subtract the long term capital gains income that would have been extra-taxed under more-drastic-changing capgains tax: $692.22B- $0.1987B = $692.22B (spreadsheet subtracts in opposite order).
• The extra take on 4.6% margin is $692.22B * (39.6%-35%) = $692.22B * 4.6% = $31.84B
• The extra take on CapGains 13% margin is $0.2B * 13% = $0.026B
• Total extra take = $31.84B + $0.026B = $31.87B

So, the marginal extra winning from the "tax the rich" racket could be, at most, $31.87B.

How much of the 2012 deficit would that cover? $31.87B/$1121B = 2.84%

Thus, the extra taxes imposed on the highest tax bracket on 1990s (1995) level using 2010 incomes would cover a whopping 2.84% (or $31.87B) of 2012 yearly Federal deficit.

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So, let's say we become even more liberal, and declare those making over $500k as "super rich". Can't we shear some extra wool off of them?

Not too much more. Same calculations:

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NOTE: This answer makes 5 assumptions: 

1. imposing higher tax brackets will NOT negatively impact the taxable income in the future, which is generally considered to be a false assumption, although the degree of impact may vary and is outside the scope of this answer. If you reject that assumption, your numbers will be even smaller.

2. That 2012+ incomes are the same as 2010 incomes. This is probably false, but IRS data lags by 2 years so it's hard to estimate correctly. If you reject this assumption, the numbers will probably be larger for 2012 incomes. But not large enough compared to 2012 to effectively move the needle off of "~3% deficit" mark to ~4% - for that, the incomes would need to rise ~30% in 2 years.

3. That the math for married-filing-separately is identical to married-filing-jointly. If a LOT of fatcats file separately, we should really include the additional taxes on income between $194,170 and $388,350 for them. But those extra taxes would amount to - at most - extra $2.5B, not really moving the needle more than 0.3% of deficit, in the extreme case that every single one of them is married AND every single one of them files separately.

4. Since the OP explicitly asked "How much of the deficit would be reduced by increasing taxes on the top 1% to 1990s levels", this answer does NOT include effects from restructuring taxable base (e.g. eliminating specific deductions).

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Here's the extra spreadsheet to calculate extra take from long-term corporate gains taxes (used in calculations above).

Answer 2

Increasing corporate tax rates from 21% to 35%, undoing the tax rate cut in the 2017 tax act would raise about $249 billion a year. U.S. C-corporations paid $374 billion of corporate income taxes in 2020 at a flat corporate income tax rate of 21% from $2,700 billion of corporate net income, reduced by $193 billion of corporate tax credits. Corporate profits predominantly benefit the top 1%.

The end of the tax treatment of capital gains would increase federal tax revenues by $162 billion, and the end of favorable taxation of qualified dividend would increase federal tax revenues by about $84 billion; allowing the deduction for 20% of pass through entity income to expire would increase tax revenues by about $55 billion a year. (Source) The pass through entity deduction dates to the 2017 Tax Act. The qualified dividends tax rule taxes to the 2003 Tax Act. The favorable treatment of capital gains dates to a few years after the 1986 tax reform, which briefly taxed capital gains as ordinary income.

These changes would raise $550 billion a year.

The annual budget deficit is about $1,200 billion a year, so the increased taxes would reduce it by about 46%.

Other tax tweaks rolling back tax breaks created after the early 1990s could raise even more, predominantly from the top 1%.

For example, the amount of gift and estate taxes imposed in the early 1990s on the top 1% was much greater than it is today (on a percentage basis).

The top 1 percent earned 26.3 percent of total AGI and paid 45.8 percent of all federal income taxes at an average income tax rate of individual income of about 26% (excluding corporate income imputed to owners of corporations). Total individual income taxes in 2021 were about $2,200 billion on $14,700 billion of individual adjusted gross income. (Source)

One could, at a minimum, easily reduce the deficit by 50% by rolling back tax breaks that predominantly benefit the top 1% to early 1990s levels.

The wealth and income needed to generate this income is there: