Using business sense with the federal deficit

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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.


  • 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?