Hard Numbers

By John Lumbard

In 2009 the President of the United States earned $5.5 million (not including the $1.4 million he received from winning the Nobel Peace Prize, which was donated to charity).  6% of the $5.5 million also went to charity, and he thus paid taxes of $1.8 million—about a third of his income—with most of it taxed at the top marginal tax rate of 35%.

Everyone agrees that the top rate is going to rise, but how much would it have to rise to cover our future obligations?  The Economist says that “By 2035 the Congressional Budget Office estimates that annual deficits, on current spending plans, would be close to 15% of GDP”.  The deficit is only 10% of GDP now, so it’s altogether fair to use the 2009 budget as a proxy for the budgets of the future, when the Baby Boomers have retired.  

In 2009 our federal government took in $2.1 trillion dollars in tax revenue, and spent $3.5 trillion (see “A Review of 2009” on the third page of this Congressional Budget Office report).  Spending was 66% larger than revenues!!

If the President simply paid 66% more in tax, he would have paid $3 million on that income of $5.5 million.  But that’s not how taxes work.  The graduated scale pushes much more onto the wealthy, and an income of $5.5 million is more than just wealthy.  At today’s interest rates a retiree would need savings of about $250 million to produce an income of $5.5 million . . .

The President has pledged not to raise taxes on families making less than $250,000 per year, aside from the increases that will result from the expiration of the Bush tax cuts.  The U.S. Census Bureau says that only 2.2 million of the nation’s 116 million households—less than 2% of the total—have earnings of more than $250,000, so the tax increases on those top earners will have to be steep. 

How steep?  The Tax Policy Center offers a calculation for a much more modest goal;  instead of balancing future budgets we’d allow deficits of 2% of GDP, and instead of limiting tax increases to the top 2% of taxpayers we’d increase taxes on the top 6%.  They nevertheless concluded that the top tax rate would rise to 76%.

We won’t get bogged down with trying to add in state tax (President Obama paid $163,000 to the state of Illinois, which has big budget problems) or sales tax, or point out that self-employed individuals—the people who create jobs— have to pay twice as much FICA as everybody else.  And we’ll accept the Tax Policy Center’s tax brackets, even though we’d like to see the budget actually balanced.  We’ll just say that the tax rate on the first $172,000 of income will be 28%, that a 33% rate will apply to the next $20,000, and that the remainder will be taxed at 76%. 

If these rates had existed in 2009 the President’s family would have paid tax of $4,093,023 on income of $5,505,409.  We’re confident that Obama would not have retired, or moved to a Caribbean tax haven, or taken aggressive steps to hide income;  but when faced with a 74% average tax rate many wealthy individuals would.  It’s quite likely that the nation would collect less revenue with very high tax rates than with the tax rates we have today.

The point is that there are no simple fixes.  There is no chance that our Congress will confront these realities unless they are forced to, and we probably won’t be able to bind them to fiscal responsibility with just one law or even one amendment to the Constitution.  Ask your candidates for federal office to take the Pledge of Fiscal Responsibility, and let us know if they agree.  Democrat, Republican, or Independent, we stand behind them, and we’ll write to any newspaper you name to lend our support.

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