Wall Street Journal | Feb. 26, 2009
Take everything they earn, and it still won’t be enough.
President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end “tax breaks for the wealthiest 2% of Americans,” and he promised that households earning less than $250,000 won’t see their taxes increased by “one single dime.”
This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can’t possibly raise enough revenue to fund Mr. Obama’s new spending ambitions.
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and “the wealthiest 2%.” Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That’s about 7% of all returns; the data aren’t broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% — about 1.65 million filers making above $388,806 — paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.
Note that federal income taxes are already “progressive” with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He’d also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won’t come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.
But let’s not stop at a 42% top rate; as a thought experiment, let’s go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable “dime” of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
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It seems to me that Obama has another option besides raising taxes.
The government could just keep borrowing the money to make up for the deficits. That is assuming other countries are willing to lend it to them. In light of our government’s reckless spending, they may begin to worry our government will default on its loans.
If other countries will not lend the U.S government money, they may be able to sell enough bonds to our central bank, The Federal Reserve. Since the Fed has the government granted monopoly privilege of buying government debt by creating money out of thin air, (counterfeiting), this shouldn’t be too difficult.
However, there is small problem: The risk of Hyper-inflation. Is this what is likely to happen and does Obama know it? Perhaps he sees this as a way out? He could borrow like there is no tomorrow and then pay back the massive debts his administration accumulated with worthless dollars.
A new currency would have to be introduced later, of course, but this has been done by many governments. Are we going to end up like Zimbabwe?
Of course, the federal government could start auctioning off all its excess assets, such as land controlled by the BLM, National Park Service and National Forest Service. Or it could sell Alaska back to Russia and Texas to Mexico, but it isn’t likely.