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

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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.

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