Is Increasing the Tax Rate for the Rich the Answer to Decreasing the Deficit? | AccountingWEB

Is Increasing the Tax Rate for the Rich the Answer to Decreasing the Deficit?

It is often stated that the federal budget deficit would be greatly reduced if tax rates were increased for the wealthiest Americans. Many in Washington have made this one of their focal points over the past several years, citing the “Bush Tax Cuts” as favoring the wealthiest 1% of Americans (i.e. taxpayers making approximately $380,000 or more a year). In a recent speech, President Obama stated that the budget deficit could be minimized if the wealthiest Americans were asked “to pay a little more.”  

Is this true though? In 2008, the top 1% paid 38% of all taxes. This is actually up from 37% paid by the richest 1% in 2000. The bottom 50% of Americans only paid 2.7% of the total tax burden in 2008-down from 3.91% in 2000. So the trend already is that the rich are paying more and more of the total tax burden, even during the “Bush Tax Cut” years that have been labeled as being friendly to the wealthiest Americans. Advocates of increasing tax rates for the wealthy often cite the 1950’s as a major success, and attribute the top rate of 91% in the early 1950’s as being the catalyst for this. What people often forget is that the middle class was also paying a much higher effective rate. In fact, during the 1950’s, the middle class was paying a much bigger percentage of the overall tax burden than they do today.
The 1950’s was a long time ago, so let’s bring this discussion into more recent times. The late 1970’s and the early to mid 1980’s still had top tax rates of 50-75% - far higher than the current 35% top rate. It would appear by these statistics that the wealthiest Americans were responsible for a greater percentage of the tax burden in the late 70’s and early 80’s than they are now, but it is actually the opposite.
As the top tax rates dramatically decreased in the 80’s and 90’s, the share of income taxes that the highest earning 1% paid actually went up. In 1979, with the highest marginal tax rate being 70%, the richest 1% of Americans were paying just slightly over 30% of the total income tax burden. Fast forward to the present where the same 1% (with a top marginal rate of only 35%) is paying close to 40% of the total income tax. Here is an excellent graphical representation of these facts (provided by the “American Thinker”).
There are several reasons we can attribute this to including the fact that effective rates were also much higher for the middle class, because taxing the highest 1% alone does not account for enough revenue in and of itself. The other reasons for this have to do with lowering the incentive for business owners. I’ve already written about one possible effect of substantially increasing the tax burden on wealthy Americans (Tax Fable). However, raising the tax rates on the wealthy would probably not cause most of the wealthy to move outside the U.S. but it could have other damaging effects on our economy, such as the unwillingness of business owners to take risk.
As tax rates increase for business owners, there is less incentive to invest in new lines of business because every dollar that can potentially be earned will be taxed at a higher rate. The government needs to provide incentive for business owners to invest in capital-not hinder them from doing so. 
Since we have seen that increasing the rate on the richest 1% alone will not close the gap in our budget, where does that leave us? In theory, if the Federal government taxed the top 1% of taxpayers at 100% (I promise I am not suggesting this), that would still only generate approximately $938 billion in total tax for that group, which is not enough to close the budget gap. The answer then for the deficit would be that the tax increases will eventually be pushed down to the middle class. 
Since there would be very few people that would favor this, there really is only one logical solution, dramatically decreasing government spending and preventing the debt ceiling from increasing further. For the first time since the Great Depression, Americans are receiving more in government handouts than they are paying in taxes. The federal government currently makes up 25% of the economy. With this type of unsustainable growth in government spending, it will be even more impossible to balance the budget in the next few years, whether the tax rates are increased or not.

This blog

by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.