The ‘Can’t Get There From Here’ Problem

If you are a devoted Democrat you can stop reading now. This column will offend you. Ditto, if you are a devoted Republican.

But if you think of yourself as an American first, read on. This column is for you. We have a major problem and both of our political parties have contributed to it. The problem will only be solved if citizens stop using the thought tranquilizers supplied by both parties, and start getting real. This column is a down payment on getting real.

Reality No. 1: The deficit isn’t a tax problem; it’s a spending problem. Republicans tell us that keeping the Bush era tax rates will aid job creation and get the country turned around. This is dead wrong. It may aid job creation more than higher tax rates on the rich, but it won’t turn the country around enough to cover the deficit. Democrats tell us that we need to shrink the deficit. They suggest the best way to do it is to put higher taxes on the rich. That is also dead wrong. As well off as the rich are— and they are better off relative to the rest of us than at any time in the last half century— the rich simply don’t have enough income to cover our current level of deficit spending.

You can understand this examining the broad figures for income, taxes and spending. Let’s start with the really big numbers.  The estimated federal deficit for the current fiscal year is about $1.4 trillion. The most recent IRS figure for federal income tax collections, $1.0 trillion in 2008, represented an average 12.24 percent tax rate on all personal income. To close the deficit, the average tax-rate everyone pays would have to be doubled— and then some. Needless to say, neither party will talk about doubling taxes on everyone.

Now let’s see if the top 10 percent of all households, those with an income of at least $113,799 in 2008, could handle the burden. This group paid 18.71 percent of their income in taxes, a total of $721 billion. It would be necessary to triple the taxes on this group— to about 60 percent— to cover the deficit. While an income of at least $113,799 looks pretty flush to the 90 percent who earn less, it’s a good bet that few of the people earning that amount would identify themselves as rich enough to triple what they pay in taxes.

So let’s go to the top 1 percent of all households, those with income of at least $380,354 in 2008. These are people who don’t worry about their cable bill. This group earned a whopping $1.7 trillion in 2008 and paid 23.27 percent of their income in taxes, a total of $392 billion. After taxes, they had nearly $1.3 trillion left. That’s a lot of money— but it isn’t enough to cover a federal deficit of $1.4 trillion. In other words, if you took 100 percent of all income earned by people in the top 1 percent, you still wouldn’t balance the federal budget.

The message here is very simple. Discussions of minor shifts in tax rates, whether they come from Democrats or Republicans, are useless diversions. They can only alert us to the cynicism of the politician speaking or to his degree of intellectual impairment. Take your pick.

Reality No. 2: The money isn’t in another pocket. Personal income taxes aren’t the only source of government revenue. How about employment taxes? How about the corporate income tax? Sorry, these are non-starters.

The second largest source of federal revenue is the employment tax— the tax that supports Social Security and Medicare.  Unfortunately, tax revenue is no longer adequate to support the promised benefits. While the employment tax has provided a cash surplus since the Social Security reform of 1984, that surplus had only one use— it allowed Democrats to spend more and Republicans to cut income taxes. In reality, both parties were unrelentingly dishonest about the financial condition of our government.

Our corporate tax rate, which raised a relatively modest $304 billion in 2008, is already the second highest corporate tax rate in the industrial world. That tax rate is a major reason so much domestic employment is being outsourced to other countries.

What about the estate tax? How about increasing it? It could be raised, but as I demonstrated in November when I suggested that we eat the rich, there simply isn’t enough wealth to keep up with federal spending.

Bottom line: We have a “can’t get there from here” problem.

Next week: How much can we tax our economy?