Obama's tax problem

In fact, not just Obama's tax problem but every progressive's tax problem. You cannot tax the rich to pay for everything. It simply won't work. For there aren't all that many rich people and cumulatively, when you add them all together, they don't have that much money.

This does, of course, sound entirely counter-intuitive. The rich are the people who have all the money, that's why they're the rich people, surely? There is of course some truth to this, but it still isn't true that we can only tax the rich and then end up on the Big Rock Candy Mountain and swimming in lakes of stew.

Let us take just one example, prompted by the President's assurance that only the rich are going to pay higher taxes. For all of us lower down the scale taxes will not rise and might even fall (or we'll get something nice without having to pay more). That assurance was that only the top 5% will see their taxes rise to pay for the joys that will fall from the Presidential pinata but for our example here let's expand that to 10% (largely on the grounds that it's easier to find international statistics on this).

First we need to point out a little piece of semantics, pedantry even. We're not in fact talking about taxing "the rich", we're talking about taxing the high income earners. Wealth is a stock, income a flow, and quite literally no one at all is talking about bringing in a substantial wealth tax (the huge exemptions and gaping holes in the estate tax means that it doesn't qualify as substantial), we're all talking about the taxation of incomes, whether those incomes come from labor, capital gains, dividends or whatever.

So, what actually are the aggregate incomes of the top 10%? Well, according to the Census Bureau, the top 20% get about half of everything and the top 5% get 22% or so. As a very rough and ready reckoner let's take the top 10%'s income as being 30%  then. Yes, this is obviously inaccurate, but it will do well enough to illustrate the point about how we cannot simply get the rich to pay for everything.

One way of measuring GDP is to look at household incomes, adding together labor income, profits, interest and all the rest. This is one of the definitions of what GDP is composed of so we can in fact say that total household income is equal to GDP. The advantage to this rather than using the more normal methods of looking at percentages of income declared and income tax paid is that this way we get all the income, from all sources. We also know what US GDP is, which is just under $14 trillion, which means we can now get a rough idea of what the top 10% get each year as a result of oppressing the rest of us.

30% of $14 trillion is $4.2 trillion: and yes, that's a whole heck of a lot of money. And while we've not been all that careful in composing our numbers, we are at least in the right ballpark. The 2002 numbers indicate $3 trillion as the income of the top 10% from the Congressional Budget Office and add a few years of inflation, a tad more widening of the inequality gap and we're around and about there.

At this point someone is bound to point out that since the entire Federal budget (not this year's, because of the cost of the bailouts that's around $4 trillion) is about $3 trillion and sure, the rich could indeed pay for it all.

Ah, but, that top 10% already do indeed pay some taxes. And we can find out here by looking at average tax rates. Note that we're not looking at marginal rates, what the top band is, but what percentage of the entire household income is paid in federal taxes, the average rate. Also note that we're not just talking about income tax either, we're talking about all federal taxes, so we've got the corporate income tax and so on already included. This ties in nicely with our above number of looking at what portion of the entire economy, not just labor income, goes to that top 10%. And what is the average tax rate? It's, for 2007, 27.5%.

Which means that our top 10% of households are already paying in federal taxes some $1.15 trillion: but of course we might think that that is not enough. They should be paying more because they are, after all, the stinking rich, aren't they? OK, so how much more? No, not how much more would they have to pay if we were to go and buy everything we want paid for by these capitalist exploiters of the working man, but how much more can we get them to pay?

A useful idea might be to go and have a look at what the same top 10% have to pay in Sweden. After all, the country is a favorite of the progessive left, held up as a shining beacon that we would do well to emulate. They've got national health care, a creche on every corner, they're still a growing industrialized country, why wouldn't we want to be like that?

The Swedish statistics are here and the end result of this is that their tax system tops out at an average tax rate of 38-40%. We are indeed comparing like with like here, for both sets of figures include the corporate income tax, income tax, excise taxes and so on. The one important difference is that our US figures include only Federal taxes: the Swedish everything, local taxation as well. It's entirely possible that in some locales in the US (say, New York City) when you add State income taxes, local income taxes, sales taxes and property taxes that people in that top 10% are already being taxed at those Swedish levels.

We might also point out that back in 1979 the top 1% (1%, not 10%) were actually paying, at 37%, average tax rates which are indeed at current Swedish levels. And we couldn't afford national health care then either, but that is an aside.

Are those Swedish tax rates as high as we can push them? No, of course not, it's entirely possible to have tax rates higher than that, you can have tax rates of over 100% quite easily. The Soviets did it to small business owners in the late 1920s and they found out quite quickly that if you tax businesses at higher than 100% then you'll not have any small businesses in a year or two. Which was of course their aim. However, is that as high as you can have the rates without moving over to the dark side of the Laffer Curve (yes children, the Laffer Curve really does exist and yes, there really are tax rates which will reduce revenue collection)? It's generally accepted that if anyone was going to be at that peak then it would be the Swedes so we could indeed assume that this is the top level possible. However, we don't really need for that to be true for our main argument here. Just that, well, if we're going to be a social democratic country like Sweden then we'll take the Swedish tax rates as being what that means, shall we?

Excellent, so our top 10% of US households currently pay, in all Federal taxes, 27.5% of those incomes. If we were to be like Sweden then they'd pay 38-40% of those incomes. 12% of the $4.2 trillion we've already said they get is just about $500 billion. That's what we can screw out of the rich if we were to impose Swedish tax rates (just for kicks, worth mentioning that Sweden doesn't have an inheritance or estate tax....).

And that is President Obama's tax problem, just as it is the tax problem for progressives across America. If we were to raise tax rates on the rich to properly social democratic levels, like Sweden, we'd only have another $500 billion a year to play with. Once we've closed the structural federal deficit (ie, not the one blown open by the current economic travails, but the one of $400 to $500 billion a year before that) then we've not actually got any money at all to pay for new programs.

No, we cannot buy national health care on that money, we can't buy national child care, it simply isn't enough. For, as stated at the top, there aren't all that many rich people and they don't, when you add it all together, have enough money to pay for all the  things that certain people would love to do.

Which leads us to an interesting conclusion: that if you want to spend like a progressive you've got to have regressive taxes. As, indeed, all of the welfare states of Europe have. All have a VAT (think like a sales tax, the major difference being that as you collect a VAT slice by slice it can be a much higher rates than a sales tax without seeing an enormous black market opening up) for example, something which weighs on the pockets of the poor much more than it does on those of the rich.

But the real point is that you cannot tax the rich to purchase everything a good progressive might desire: there just aren't enough of them and they don't have enough money to be taxed. If you want to go the whole hog to social democracy then you've got to raise taxes on the poor as well: just as all the social democracies have done.

Just to go back to our Swedish numbers again, a household in the middle quintile is paying about 26% of total income in tax. Here in the US it's about 14%. Or for some in the bottom quintile, 13 % as against 4% here.

As above, to pay for all the wonderful progressive projects you've got to tax regressively, at least, more regressively than the US currently does.