Sunday, August 19, 2012

Two Budget and Tax Untruths.

Two claims continue to circulate about our present fiscal crisis: the first, that we can grow our way out of debt, and the second, that a more aggressive tax policy toward the top earners (those making above $250K per year) will effectively fill the deficit hole.

Let's dispose of Whopper Number One. Suppose that the US GDP grows at 3.5% per year (the effective growth rate from 2000-2010). This is an additional $420B in the economy, and a federal tax rate of 25% of this contributes about $105B per year towards debt reduction. This is a fraction of the current deficit, so our government would continue to bleed red ink, albeit at a modestly lower rate.

As for Whopper Number Two, consider that the total AGI of the top 5% of earners (those making more than $160K per year!) is $2.9T. If we increased the effective tax rate of this group by 50% (for an effective rate of 31% for all in this group) this will provide only an additional $303B in revenue. Either the pledge to tax only the "rich" would have to reneged, or the tax rate would have to much more confiscatory, or both.

Either of these amounts is small compared to our $1.6T deficit, and their sum is less than half of it. Why do we let the blowhards continue to spin either of these fables?

We are face a moment of truth regarding the extent to which government can materially provide for its citizens through entitlements.

2 comments:

Steve Southard said...

Maybe a third myth?: That we can balance the budget ONLY by cutting entitlements.

RollCast said...

Spending on entitlements: Medicaid/Medicare, income security, and Social Security now consitute 60% of all federal spending. 20% spending is in defense. Defense is being cut by $50 per year, about a cut of 10%. I don't know of another department that is taking an equivalent hit.