jungle

April 05, 2011
Why we can't tax ourselves out of the deficit problem
Steve McCann

Yesterday I was in the belly of the beast: Washington D.C. At a lunch meeting, which included a number of liberal Democrats, the inevitable subject of the runaway spending and debt came up, particularly in light of Paul Ryan issuing a budget which would go a long way toward curing our financial ills. While I and others extolled the positive economic effects of dramatically reducing government spending, those on the other side refused to come off the mantra of all we have to do is raise taxes on the rich and that will solve nearly all our problems.


Admittedly, all of those who were in that camp were, you guessed it, lifelong government bureaucrats. I forcefully made the case that raising taxes on the rich would not generate anywhere near the revenue they thought, or even make a dent in the deficit, and would in fact end up reducing revenue and killing job creation. The argument fell on deaf ears. So, having done the research on the issue in the past based on numbers from their fellow bureaucrats in the IRS, I told them I would forward the details.


I am doing so through the American Thinker in a devious attempt to not only get their attention but to ruin their day by forcing them to see and hopefully read the articles and blog entries.


The data is contained on the following IRS site: Section: Tax Generated; subsection; Tax rate and size of Adjusted Gross Income (2008): Table 3.5 (The table is here)


The tax year of 2008 was the last to date that the IRS has done this kind of analysis. In 2008 the highest marginal tax rate of 35% applied to all AGI above $357,700.00. In that year the total amount of AGI subject to the highest rate was $622.8 Billion. The government collected in taxes $218.0 Billion (35%).


In 2011 the annual budget deficit will be nearly $1,665.0 Billion and in 2012: $1,100.0 Billion. If the Liberal Democrats in league with the Socialists, the Unions and the Communists, succeed in raising the highest marginal rate, how much more would Washington D.C. receive, assuming no change in behavior and a general eagerness to pay more?


If the highest rate of 35% were raised by a factor of 20% to 42%, then the additional tax revenue would be $43.5 Billion, not much of a dent in $1,665.0 Billion. So, let's raise the rate by a factor of 50% to 52.5%; the additional revenue would be $108.9 Billion. Still nowhere near enough, so let's just tax it at a rate of 100%, bringing in an additional $404.8 Billion. Unfortunately the country is still $1,260.0 Billion in the hole for the year.


Obviously by confiscating at 100% of all the income of the so-called rich above a predetermined level, there would never again be an incentive to earn above the highest tax rate threshold. So where will the Left have to turn next: where the money is, the middle class.


The Left knows the gullible among us easily fall for centuries-old class warfare rhetoric that demonizes the wealthy, yet they persist in doing the unconscionable, as it keeps them in power despite the fact that it enflames passions and in some cases, violence.


What the Democrats are doing is entirely based on a lie. The United States cannot tax its way out of the present financial crisis, and from a cursory examination of Paul Ryan's proposal, his is the best plan yet presented and needs to be defended and promoted.

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To keep this apolitical just substitute left/right anytime you see left above, that brings us closer to the truth without the normal bias.

tomgoodman

High taxes on the rich do not directly yield a great deal of revenue, but they greatly increase the willingness of the non-rich to pay taxes (at a more modest rate), which does yield a great deal of revenue. In a tax system which is so dependent on voluntary compliance, this is a politically acceptable way to avoid a tax revolt.

Grumble

You must be smoking crack. Statements like this have to be backed up with factual data. I've NEVER heard this corrolation, nor does the tax rate on the rich increase or diminish at all my "willingness" to pay taxes. And there is NOTHING voluntary about it. Takes are TAKEN. Don't believe that, stop paying them and see what happens.

jungle

Tom makes an interesting point, one that was made a long time ago, although phrased a little differently:

The excerpt below is from pgs 19-20, Annual Report of the Secretary of the Treasury on the State of Finances for 1921:


"But the direct effect of these very high taxes is to hinder and prevent business transactions which would otherwise take place. A man may have property which he has held for years and which has greatly increased in value, and he would like to sell it, but if he does a large part of the gain would have to be paid out in taxes. He would rather keep the property than sell it, pay the tax, and invest what is left in something else. At the same time the party desiring to buy this property, if he obtained it, would improve it with buildings.

What is the result? The transaction does not take place, and the community loses the advantage which would come in the stimulation that would arise from the transactions resulting from the buyer's improvement of the property, and it also loses the advantage of the seller's putting his money into some other form of investment, which in turn would give rise to business transactions. The same thing on a much greater scale is true in manufacturing and mercantile lines. Men have built up enterprises to the point where they are highly successful. They would like to take their profit and turn the business over to younger men to carry on.

These transactions are highly desirable not only for the parties but for the community, yet they are absolutely stopped, because if made the seller would have to pay in one year a tax on a gain which has been the result of perhaps the better part of a lifetime of effort. And in all such cases the Government gets no tax, whereas if the rates were reasonable the transactions would take place and the Government's revenues would benefit accordingly.

The free interchange of property in business transactions is essential to the normal prosperity of the country, and each such transaction has a direct tendency to bring about others of like character with the result of increasing the amount of gain or income available for taxation; but when the tax is so high as to act as a deterrent against usual and desirable business transactions, and the volume of such transactions is thereby lessened, the inevitable result is for the tax to become less and less productive.

It is for these reasons that, particularly in the higher brackets, a lower tax rate will produce more revenue in the long run than excessive rates. So long as the high rate stands in the way of accomplishing bargains and sales, the Government receives no tax; but at a lower rate the transactions proceed and the Government shares in the profits."
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The most amusing thing about all of this is that the gov could just print money instead of collecting taxes, to a large extent that is exactly what they are doing now, on a truly massive scale-well beyond what is needed or collected.

Puzzle on that for awhile. Anyone care to venture how and why this has become the norm?

The voluntary part went out with mandatory withholding for the vast majority of us.

A tax revolt may be just around the corner on the present path.

Grumble

A tax revolt has been taking place for a number of years now, and quietly gaining ground. Politics however keep getting in the way of progress. Better stated, congress is the opposite of progress.

Americans For Fair Taxation: Americans For Fair Taxation

jungle

You might say an effort at education has been going on for years, but there has been no revolt, in fact just the opposite-ever increasing rates of taxation through other means such as printing money and inflation-they are not recognized as a tax by most of us, but they are the largest tax of all. A massive tax on all future earnings, you see, the present and past was simply not anywhere near enough to cover current and past spending.

The revolution will have a light buffet, perhaps a little rifle practice.
There will be much more poverty, and a lot of anger when the empty bag is finally displayed for all to see.

tomgoodman

Actually, I agree with Jungle. My post only suggested a political reason that officials do what is economically unproductive. They're not completely stupid, and know full well where the real tax revenue is to be found. They also know that "voluntary compliance" is absolutely critical to the IRS, even though most taxpayers don't know it.
On voluntary compliance, voluntary taxes, and social capital.(Symposium: What Do We Mean by "Taxpayer Relief"?) - National Tax Journal | HighBeam Research - FREE trial
In WWII, kids were encouraged to collect tinfoil and string "for the war effort". That stuff was useless, but the campaign boosted sales of War Bonds, which were useful indeed. Government is largely management of perceptions.

jungle

You might say they aren't completely stupid, at least as far as seeking reelection, but what they are doing is criminal and without any thought of the greater good.

The real problem they have is how to boost enthusiasm without a just war.
The substitute is wars against the social ills, ills that will never be cured with any amount of money.

Interesting times.

The idea of a taxpayer strike is becoming more realistic, withholding is the only thing holding most of us back.
A general strike would take care of that limitation, but the printing might go on with no limit at all. At least until it met reality.

DYNASTY HVY

As long as the status qou continues to rob Peter to pay Paul as the saying goes it will continue until Peter runs out of money or just flat out refuses to pay.
NYC found out the hard way about overtaxation of the rich.


Ally

jungle

Tax The Rich? Good Luck With That - Investors.com