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Happy Tax Day?

Posted by Richard on April 19, 2011

Tax Day is an unpleasant event for some of us, irrelevant for many, and a happy occasion for others. Nearly half of all households (45% this year, down from 47% last year) pay no income taxes.

About 40% of households profit from the income tax system. The earned income credit and other "refundable" tax credits far exceed what little they owe in taxes, so the government sends them a check for everything they had withheld and a bunch extra — a Happy Tax Day!

Today, more than a third of what's called "salaries and wages" is actually government transfer payments, a.k.a. handouts. Meanwhile, the more productive members of society are paying a far larger share of income taxes than their share of income. The top 10% of income earners, who receive 45% of the total adjusted gross income, pay 70% of all income taxes.

Still, our Socialist Democrat in Chief and his leftist friends continue to scream "tax the rich!" The Wall Street Journal pointed out what nonsense it is to claim we can put our financial house in order by making the rich pay, in the President's words, "a little more": 

Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

If the IRS confiscated 100% of the income of everyone earning more than $100,000 a year, it wouldn't cover the Obama budget. And it's not like you can keep coming back and taking 100% of someone's income year after year. They wise up. 

They can preach class warfare and chant "tax the rich" all they want — the only way to balance the federal budget at today's insanely high level (26% of GDP) is to stick it to the middle class. That's where the bulk of the people are, and thus where the bulk of the money is. 

The Heritage Foundation figured out how much tax rates would have to go up to balance the budget without cutting spending. And they did it assuming there were no other tax law changes, so the relative share of revenue from each tax bracket remained the same:

To collect the additional revenue necessary to close the 2010 deficit, income tax rates would have to have been considerably higher than their current levels. Without altering other aspects of the tax code, if Congress collected the extra revenue by simply hiking each income bracket based on its portion of current tax collections, every tax rate would need to more than double.

For a family of four earning $50,000 that takes the standard deduction, its current tax bill of $766 would increase by almost $4,000. A similar family of four that earned $75,000 a year would see its tax liability of $4,500 increase by over $9,000 a year. If the same family earned $100,000, it would pay more than $15,600 above the $8,800 it actually paid in 2010.

The top rate in this scenario would be 85 percent. A top rate at that level would grind economic activity to a halt. Businesses would stop investing and creating new jobs because the tax-diminished returns would not be worth the risk. Many workers would cut back the hours they spend on the job. The end result would be a poorer nation with a bleaker future.

Today's 10% bracket would jump to 24%, the 15% bracket would become 37%, and the 25% bracket would need to be 61%. I don't know about you, but I'd make sure I never entered that 61% bracket. 

Then, just for grins, Heritage calculated what it would take to balance the budget at today's level if Obama kept his promise of not increasing income taxes on anyone earning under $250,000:

If, instead of raising taxes at all income levels, Congress collected it from just those making $250,000 or more per year, their rates would have to rise to levels that are not even possible. The top two rates would need to rise to 132 percent and 142 percent.

Of course, it is impossible to tax at a rate over 100 percent. Doing so would require confiscating savings, investment, or even other assets. Moreover, as a practical matter, it is impossible to get even close to 100 percent and still raise revenue because businesses, workers, and investors would simply stop producing, working, and investing as the government came close to confiscating almost every additional dollar they earned. Much of their economic activity would be driven underground.

As a practical matter, it's impossible to raise middle-class tax rates to 61% in a country with such widespread gun ownership. And a good thing, too.

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2 Responses to “Happy Tax Day?”

  1. David Aitken said

    In the early 1990’s, Congress decided to tax the rich. They imposed a 10 percent luxury tax on yachts costing $100,000 or more. The rich quit buying yachts, or they bought them overseas. Instead of getting more revenue and screwing the rich, the government collected no revenue, bankrupted several boatyards, and caused thousands of craftsmen (cabinet makers, welders, etc) to lose their jobs. Those who ignore history are doomed to repeat it.

  2. David Bryant said

    IIRC, there is a situation in the Internal Revenue Code that can result in an effective tax rate exceeding 100%. It involves a once popular tax avoidance scheme for corporations known as the ”retired lives reserve”. Briefly, if such a scheme was unwound before the last beneficiary had died, the corporation would have to declare the distribution of assets as taxable income, and that distribution (from the insurance company back to the corporation) was also subject to a 100% excise tax.

    I never did figure out how this particular provision got into the code. I suspect it was added at the behest of insurance company lobbyists who wished to lock several large clients into existing arrangements. But I never was able to prove that to my own satisfaction.

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