Using business sense with the federal deficit

Now that the US elections are over, I am hoping that it is safe to deal with an issue that, to me, is an economics and business one, even if it remains political: the budget deficit.

I will avoid the Republican vs. Democrat, where to tax/cut issue, and instead deal with it from a pure numbers perspective. My question is simple: how much money is there to tax if we want to eliminate (or otherwise) attack the deficit. This does not address spending cuts, just the revenue side of the equation.

Sources:

  • The IRS gives adjusted gross income (AGI) and tax paid at various levels of income; I am using FY2009, the most recent year for which information is available.
  • The US Treasury gives debt outstanding, as of this writing, just over $16TN.

And some terms:

  • “Deficit” means the gap between revenues and expenses in any given year, what those of us in the real world call the “operating loss.”
  • “Debt” or “debt outstanding” is the total accumulated deficits over the years, what those of us in the real world call (Negative) “Retained Earnings.”

The most recent US Government budget for FY2012 is as follows: revenues (income taxes, corporate taxes, customs, fees, etc.) of $2.469TN; expenses of $3.796TN. So the federal deficit for FY2012 is $1.327TN, or the government lost $1.327TN, adding to the total debt. The $16TN of total debt or Negative Retained Earnings includes the $1.327TN deficit/loss, since the US Government’s FY2012 ended on 30 September 2012.

Ignoring debt outstanding, let’s look at how much we can do just to balance the US Government’s budget. Below is the table of total earnings for the top 0.1%, 1%, 10% and 20% of filing earners (individuals or couples filing jointly) in the US for FY2009:

Top Income Cumulative Income AGI Above Cumulative Taxes Paid % of all taxes Effective Rate Cumulative Net After Tax Additional Federal Revenue if tax at 100% Additional Federal Revenue if tax at 50%
0.1% $597BN $1,500,000 $145BN 16.7% 24.25% $452BN $452BN $154BN
1% $1,325BN $344,000 $318BN 36.7% 24.00% $1,007BN $1,007BN $344BN
10% $3,380BN $112,000 $610BN 70.5% 18.05% $2,770BN $2,770BN $1,080BN
20% $4,756BN $75,000 $727BN 84.0% 15.29% $4,029BN $4,029BN $1,651BN

 

Let’s see some options:

  1. Take It All: The total cumulative income of the top 1% of earners, those making $344,000 a year or more, is $1.325TN, or roughly the same as the deficit. But, of course, we already tax $318BN of it, for ~$1TN left over. If we taxed the top 1% at all of their income, we would still be short $327BN to cover just this year’s deficit. Of course, if we taxed them at 100%, in other words, they worked but got to take home no money at all, none would work, and we would lose all of the $318BN they already pay in taxes, increasing the deficit.
  2. Take Half: OK, so we don’t want to take all of it. What if we took half of everyone’s income? I am not talking about marginal rates, the rate on the next dollar earned, but effective rates, the actual amount paid. What if we took half of everyone’s income, from the top all the way down, until we got rid of the deficit? Of course, we would not get an additional half of their income, since most of them are paying roughly a quarter of their income to federal taxes anyways. Still, how far down would we have to go to get rid of the deficit? Looking at the 50% column, we can see that we would need to have an effective tax rate of 50% on the top 20% of earners to eliminate just this year’s deficit. That means everyone making more than $75,000 per year, from Warren Buffett and Bill Gates, all the way down to your local fireman (e.g. NYC firemen make over $75,000 after 5 years on the job), would need to fork over half of their income to the government. For everyone, that is at least doubling, in most cases more than doubling, the amount of federal taxes paid. Of course, even the most ardent taxer, let alone supply-sider, would agree that doubling taxes will have a severe impact on economic activity.
  3. Just Another Half: OK, so we won’t be extreme. What if we wanted not to double, but just to increase by 50% the taxes paid by everyone, from the top, down, until the deficit is covered? How far down do we need to go? I didn’t put it in here, to make the chart more straightforward. The answer is: everyone is not enough. Total personal income tax paid in 2009 was $866BN. If everyone paid 50% more in taxes, it would only generate an additional $433BN, just a third of the deficit.

I don’t care much for politics, I do care for the rational and for business, and very much for the US. What comes out very clearly is that, no matter how much I wish it, there simply isn’t enough income in the country to get rid of the deficit by taxing just the wealthy. The only way to do it is:

  • Cut massively, or cut with some taxation increase, which will have only a small impact on the deficit.
  • Double the taxes paid by everyone making $75,000 a year and up
  • Some combination of the above

Warren Buffett, Bill Gates and Larry Ellison are thousands of times richer than each of us, but there are almost 300MM of us, and just a few of them. Now maybe those politicians can get somewhere to improve our fisc?

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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2 Responses to Using business sense with the federal deficit

  1. Yossi says:

    I would suggest that the number we should be looking to cover should be no more than 400 Billion.

    While today we are experiencing a deficit of 1.1 trillion or so, (http://research.stlouisfed.org/fred2/graph/?g=cET) much of that is almost directly attributable to wars of choice (at least 300 billion), which I would hope you wouldn’t expect to continue forever, as well as a deeply depressed economy, which has massively increased government spending on income security (unemployment payments, food stamps, etc), from about 350, to around 600 billion (~250, data from http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf table 3.1, summarized in https://sphotos-a.xx.fbcdn.net/hphotos-snc6/216369_10151135245032157_1943569405_n.jpg). Additionally, our economy is performing at around 6% below potential, meaning if we were not in a depressed economy, the government would expect 6% more revenue, for an additional 160 billion. So just stopping our active, unfunded wars (which the country seems to want to do), and getting out of a depressed economy will reduce our deficit, almost automatically, some 700 billion. Putting us in the 400 billion deficit Range.

    One doesn’t need to look at more than a 25% tax hike on the top 10% of the country, to find that. That would be in line with much of the tax rate from 1940-1980, where the country had significantly higher annual GDP growth than it has from 1980-today, with our lower top margin tax brackets today.

  2. avi says:

    Yossi,

    Thanks for the information, this is really good. My whole point of the post was to look at what is *possible*, as opposed to *desirable*. In other words, if it is possible to fund the country’s obligations, then whether we *should* spend on X or Y and how much, and whether we *should* tax at level a% or b%, becomes a reasonable political philosophy question in which parties can engage.

    I will definitely review your numbers and do a follow-up post, hopefully this week.

    Thank you!

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