Could raising the tax on the wealthy, without cutting spending, balance the federal budget in the US?

Question

Some of the stalemate over the Fiscal Cliff has been over whether to raise the tax rate on the wealthy in order to raise additional revenue.

One argument that is frequently made is that the main problem is not revenue, it is the level of spending. More specifically, that no amount of tax revue from the wealthy would be enough to cover the current spending levels.

Is that argument in favor of bigger spending cuts sound? Can it be substantiated with actual numbers?

If you would consider the "wealthy" to be everyone who earns more than one million per year in income or capital gains (which was a cutoff for many proposals over the last two years), could taxing their income at any level fund the current federal government spending? If yes, what would the effective tax rate have to be? If no, what is the most you can fund at 100% effective rate? (assume 2012 revenues and spending).

(Note: No one is asking the rich to pay 100% of their income over a certain level, but this question is about whether the budget deficit is theoretically addressable without major spending cuts.)

NOTE: I'm not looking for discussions over whether such taxes are fair or not. Merely how the two numbers compare. The answer should consist of the following numbers:

1. Current federal spending deficit for 2012 (revenues - spending)

2. Total income of those earning $1mil + for a year

3. If #1 < #2, what % of #2 is #1?

4. If #1 > #2, what amount and % of deficit is not covered?

To be clear, the "deficit" discussed here is the annual deficit, not the total federal debt.

Answer 1

Point by point.... (all numbers for FY2012 unless otherwise stated)

Total Revenues -- $2.469 trillion

Total Expenditures -- $3.590 trillion

2012 Budget Deficit - $1.121 trillion

(Above numbers are from the OMB)

From the IRS raw data:

Year -- Total income for those grossing over $1m -- Total taxable income over $1m

2007 -- $1.401 trillion -- $1.008 trillion

2008 -- $1.076 trillion -- $754 billion

2009 -- $726 billion -- $490 billion

We don't have hard IRS data for any year after 2009, which was the worst year in the recession, so this is not a great yardstick.

However, looking at the economy as a whole (real GDP) year-to-year from the BEA

2007 -- $13.33 T

2008 -- $12.88 T

2009 -- $12.87 T

2010 -- $13.18 T

2011 -- $13.44 T

2012 -- $13.89 T (assuming 2% growth in Q4)

Based on these numbers, the answer is, "probably not."

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Even if personal incomes return to 2007 levels, there is not enough income in the over-1-million bracket to cover the current deficit for FY2012. Total GDP is higher than in 2007 but that doesn't tie directly to personal income, and there would still be a $100B deficit at 2007 levels.

Another interesting point from these numbers is that the last year a 100% tax on income over $1m would have balanced the budget was 2007, when the deficit was around $160B.

Answer 2

When you ask for how much will the tax rate have to be for rich people to wipe out the budget, you're most likely to be presented with a How Much is a Million?, Lies, Damn Lies, and Statistics Edition.

The reason for this is because "taxes on the rich" can be defined in a lot of ways, such as making arbitrary cutoffs on who's rich and only counting certain types of taxes, such as personal income tax, payroll tax, corporate tax, capital gains tax, estate tax, etc.

That being said, The deficit is to the point now, where if you actually want to cut it, you're going to have to BOTH raise taxes AND cut spending. Either/or is just not going to cut it.

Answer 3

The base answer is a simple "Yes". How to get there is a source of endless debate. For a rough answer, we can look in: List of countries by government spending as percentage of GDP

Seems all government spending in the United States of America adds up to about 45% of GDP. Yes, we are entirely capable of balancing the budget.

As a side-note, a few percent of that is money paid to rich people (as interest), which is ... weird.

The civic and economic context of the United States is maintained by government. That context has costs. If you derive wealth from that context, then you should pay a share of the costs.

As most of the wealth in this country is captured by rich folk, any vaguely fair scheme will collect from rich folk. There are many different answers for how to collect. The question did not ask how.

Again, the base answer is "Yes", we can balance the government budgets.