Taxing the Rich in America, Taxing Everyone as Rich in Europe

Posted by PITHOCRATES - September 24th, 2011

Spending is so Great the Only Way to get Serious Deficit Reduction is with Spending Cuts

Dan Greenhaus with BTIG looked at Obama‘s proposed Buffet Tax.  Crunched the numbers from the 2009 U.S. tax returns.  And found that the Buffet Tax is more politics than deficit reduction (see A Little Bit Of Math On The ‘Buffett Tax’ by Joe Weisenthal posted 9/19/2011 on Business Insider Politix).

Nonetheless, if we add up the $1,000,000 and above categories, we get taxable income of $623.6 billion that resulted in $177.5 billion in income tax paid, a rate of less than 28.5%. If we were able to somehow change that tax rate to say 35%, an increase of more than 7 percentage points, the income tax paid in 2009 would have been over $218 billion or an increase of a bit less than $41 billion. If we were able to do this over ten years, the U.S. would have extra income of $410 billion. All from raising taxes by seven full percentage points on those making income over $1,000,000.

Unfortunately, $410 billion is “only” about 7% of the deficit we expect to incur over the next ten years. That is not an inconsequential portion but considering the debate surrounding hiking tax rates by any amount, let alone generating an increase sufficient see a seven percentage point increase in taxes paid, as well as the negative consequences such a sharp adjustment would engender, this hardly seems to be the “only” place to go to achieve debt reduction.

The magnitude of the deficit is too great to pay with new taxes.  As it is now, the 2011 deficit will come in at $1.65 trillion.  A 7% tax rate hike would net an additional $41 billion.  Or $410 billion over ten years.  This would reduce the 2011 deficit from $1.65 trillion to $1.61 trillion.  Not impressive.  Remember, Standard and Poor’s wanted to see $4 trillion in debt reduction over the next decade.  And $410 billion is a long way from $4 trillion.

Take a close look at these numbers.  A $1.65 trillion dollar deficit.  And taxable income as reported to the IRS of $623.6 billion.  The deficit is 2.6 times the total taxable income from those making $1 million or more.  In other words, you could tax away all of their money and the government would still run a deficit.

The spending is so great that the only way you’re going to get serious deficit reduction is with spending cuts.  Because spending is big enough to cut to make a difference.  Unlike taxing the Warren Buffets.  Whose incomes aren’t big enough to make a difference.

So when Keynesian tax and spend liberal Democrats talk about serious deficit reduction it’s just misdirection.  They know they can’t reduce the deficit.  But that’s okay with them.  For that isn’t their goal.  They want to raise taxes for a different reason.  They like to spend.  It’s how they get power.  And votes.  But when you run such massive deficits it’s hard to spend more.  Unless you raise taxes.  And that’s why they want to raise taxes.  Not to reduce the deficit.  Which is impossible to do with tax hikes.  They’ve just run out of money.  And they want more to spend.

Left of Center Welfare States are Always Good for Vote-Getting

And if you think it’s bad on this side of the Atlantic, you should see what they’re doing on the other side.  The Europeans have a lot of social democracies.  Left-of-center governments.  With huge welfare states.  Which is always good for vote-getting.  But it comes at a price.  High taxes.  And lots of debt.

To keep spending at their levels of spending they have raised tax rates on the ‘rich’.  And lowered the threshold for being ‘rich’.  The Business Insider crunched the numbers and put together a little slideshow showing the tax rates.  And what it means to be rich in these countries.  We pulled the data from the slide show and put them into tabular form below (see These Are The Toughest Taxes For Europe’s High Earners by Nick Jardine posted 9/24/2011 on Business Insider Europe).

We calculated the numbers above based on the threshold salary that puts these taxpayers into the top tax rate.  And the tax rate.  All numbers are in U.S. dollars.  The numbers very a little from the Business Insider slideshow possibly due to rounding error.  Or other tax considerations.  But the numbers were close enough to fill in the blanks where needed.  Though it may not be completely accurate, the numbers should be close enough in magnitude for the purpose of discussion.

When they couldn’t Tax the Rich Anymore, they Taxed the Middle Class.  By Redefining them as Rich.

Depending on your political persuasion, you no doubt will draw different conclusions from these numbers.  A Keynesian liberal Democrat will say Germany isn’t taxing their rich enough.  That they are the richest of the rich.  And that they should probably tax everyone earning over, say, $100,000 at the highest rate.  Like in Greece.  A non-Keynesian will see it differently.  They will note that only the German economy is rich enough to bailout the poorer nations of the Eurozone.  Particularly Greece.  Meaning that the more rich people you let be rich the more tax revenue you will have.

A non-Keynesian will think it’s not fair that a rich German only gets to keep $3,581 from the $6,511 he or she earns every week.  The Keynesian will have no problem with that.  Of course, they may not think it’s fair that a Belgian only gets to keep $446 of the $892 he or she earns every week.  They’ll think it’s fair to take about half of what the rich make.  But they don’t think it’s fair calling someone rich who makes only $46,349.  Or calling someone rich who only makes $20,613.  Especially if they earn more than they do.  And currently pay no income taxes.

None of these countries started out at these income thresholds or tax rates.  They’ve lowered income thresholds through the years.  And they’ve raised tax rates.  Whenever their governments spent more money than they had.  Employing class warfare they vilified the rich.  Raised their tax rates.  And when they couldn’t raise tax rates on the rich anymore, they raised taxes on the middle class.  By redefining them as rich.  And they then paid the higher tax rates.  It’s gotten so bad in some countries that people who pay no income tax in America would be paying the highest tax rate in some European countries.  But it all starts with taxing the rich.

With Keynesians in Power you’ll never see Spending Cuts because that’s how Democrats Buy Votes

We have to be careful of what we ask for.  Such as taxing the rich.  Because we may be rich ourselves one day.  As the threshold for being rich shrinks over time.  First it was the billionaires.  Then the millionaires.  Then those earning $200,000 or more.  Then those earning $100,000 or more.  Down to as low as $20,000.

Fair is fair they’ll say.  So you’ll agree to make the rich pay their fair share.  And then those earning less than you will also agree to make the rich pay their fair share.  And by rich they’ll mean you.  Until all earners will be taxed at the highest rate.  To support those non-earners who vote Democrat.

But no matter how much they’ll take it will never be enough.  Because you can’t reduce the deficit/debt by raising taxes.  They’re just too big.  The only way you can reduce these is by reducing the thing that made them so big.  Spending.  But that’s not likely to happen.  As long as Keynesians are in power.  Because that’s how Keynesian tax and spend liberal Democrats buy votes.

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Insufficient Spending Cuts triggers S&P Downgrade, not Insufficient Taxes

Posted by PITHOCRATES - August 6th, 2011

Ah, the Good Old Days when Communists didn’t school Americans in Capitalism

It happened.  S&P downgraded the U.S.  Just like they said they would if we didn’t make $4 trillion in spending cuts.  And our patron is not pleased (see China attacks US debt ‘addiction’ after America loses AAA credit rating by Richard Blackden posted 8/6/2011 on The Telegraph).

“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China said in a commentary carried by the Xinhua News Agency.

Ouch.  Strong words from a communist.  The Soviet Union never gave us lessons in capitalism when there was a Soviet Union.  Then again, we always had a AAA bond rating back then.  And their GDP growth wasn’t greater than ours.  Ah, the good old days.  When communists didn’t school Americans in capitalism.

Vince Cable, the British Business Secretary, said the downgrade was an “entirely predictable consequence of the mess that the Congress created a few weeks ago when they couldn’t agree on lifting the debt ceiling.”

Francois Baroin, France’s finance minister, said his country had total confidence in the US economy, while India called the “situation was grave” and Russia said it would keep the level of dollar investments in its national reserve funds, adding: “There is not a great difference between AAA and AA+.”

Those are some very supportive words from the Russians.  Which differ slightly from previous remarks when Putin said, “They are living like parasites off the global economy and their monopoly of the dollar.”  It’s subtle but it’s there.  On the one hand the downgrade is no big deal.  On the other we’re the scum of the earth.  It’s subtle but there is a distinct difference in these statements.  They resent us.  But they can’t live without us.  Kind of sweet.  In a bitter way.

In an explanation of the decision, S&P said that despite last week’s agreement, which raised the $14.3trillion debt ceiling and promised cuts of $2.5 trillion to the deficit over the next decade, the ratio of America’s public debt to the size of its economy may climb to 79pc in 2015 and 85pc by 2021. It is understood that an agreement that had delivered a $4 trillion reduction in the debt pile would have preserved the AAA rating.

S&P downgraded us, of course, for having too much debt.  Now debt grows from having annual deficits.  And deficits are caused by either taxing too little.  Or by spending too much.  S&P wanted to see the debt reduced by $4 trillion.  They only got $2.5 trillion.  Hence the downgrade. 

You can’t Reduce the Debt $4 Trillion by Raising Taxes, at least not Mathematically

Reducing the debt by $4 trillion won’t be easy.  That’s a lot of money.  About $333 billion each month.  Current tax revenue into Washington is about $200 billion each month.  So, to get this $4 trillion in deficit reduction with new taxes only would require raising monthly tax revenue from $200 billion to $533 billion (an increase of 166%).  Increasing taxes by 166% (income taxes, payroll taxes, capital gains taxes, etc.) is going to do some devastating economic damage.  The kind the economy is not going to get up and walk away from.  So it’s a non-solution.

But what about a balanced approach?  In addition to that $2.5 trillion in cuts we throw in $1.5 trillion in new taxes for a total $4 trillion in debt reduction.  $1.5 trillion is about $125 billion each month.  This would increase monthly tax revenue from $200 billion to $325 billion (an increase of 65%).  This will also do some serious economic damage.  So it’s a non-solution, too.

And sticking it to the ‘rich’ won’t work either.  For they can’t afford it.  Let’s look at the numbers.  The total adjusted gross income reported in 2009 was $7.626 trillion.  The percent of that total earned by the top 5% earners (earning $159,619 or more) is 31%.  So the total income of the top 5% in 2009 is $2.36 trillion.  Total federal income taxes paid in 2009 was $1.05 trillion.  The top 5% of earners pay 59% of all federal income taxes.  So the total they paid in income taxes in 2009 is $570 billion.  This leaves a balance of $1.79 trillion of their earnings they didn’t pay in federal income taxes, or about $150 billion each month.  Which is not enough to pay an additional $333 billion each month.  But it is enough to pay an additional $125 billion each month.  As long as these people are willing to pay an effective federal income tax rate of 87.6%.  Which I doubt.  For another 12.4% in taxes (state, country, local, property, gas, sales, etc.) and they’re working for free.  Like a slave.  Only without the free room and board.

You can’t reduce the debt enough by raising taxes a lot.  Or a little.  The rich people (those earning $159,619 or more) will run out of earnings before they can pay the $4 trillion in debt reduction.  It’s just mathematically impossible.  The only way you can do this is by cutting spending.  And they didn’t.  Hence the downgrade.

Paul Krugman ‘defends’ Ronald Reagan’s and George W. Bush’s Deficits

Meanwhile, while the S&P tragedy unfolds, Paul Krugman ‘defends’ Ronald Reagan‘s and George W. Bush‘s deficits.  Saying that big deficits aren’t a big deal.  And we don’t have to knock ourselves out trying to pay down the debt they create.  For depreciation of the dollar makes those once large numbers become trivial (see The Arithmetic of Near-term Deficits and Debt by Paul Krugman posted 8/6/2011 on The New York Times).

What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.

Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.

Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

Of course I’m extrapolating his remarks to apply them to the Reagan and Bush deficits.  For if they hold for a $1.6 trillion dollar deficit then they surely hold for a $200 billion (Reagan) and a $400 billion deficit (Bush).  The key is to make that old debt worth less by making the dollar worth less.  The more you devalue the dollar the less that debt held by the Chinese is worth.  As well as the debt held by pension funds and retirement accounts.  And our personal savings.  For inflation is a killer of dollar-denominated assets.  Which is good for the debtor (the seller of treasuries).  But bad for the creditor (the buyer of treasuries).

Further extrapolating Krugman’s remarks one must conclude that with the deficit being trivial he would endorse the economic boom of the Eighties.  And agree that Reaganomics was a success.  For the argument has always been that Reaganomics traded exceptional GDP growth for deficits.  But with deficits being trivial, there is no tradeoff for that exceptional GDP growth.

To Live within our Means we will have to Cut Spending 

True, inflation will make bonds easier to redeem 30 years later.  But too much inflation causes a lot of damage.  Especially to those living on fixed incomes.  No, a better solution would be to live within our means.  And that doesn’t mean raising taxes.  Besides, the rich don’t have much left to give.  No, if we’re going to live within our means we will have to cut spending.  As painful as that may be.  And the longer we wait to make those cuts the more painful those cuts will be.

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