Editorials

Social Levelers On Left Need Rich To Fund Their Spending Appetites

By J.T. YOUNG | Posted Tuesday, February 24, 2009 4:20 PM PT

After months of mouthing rob-the-rich rhetoric, November's election results have many on the left ready to ring in the New Year by wringing out the rich. But champagne revels must now give way to harsh reality: The left needs the rich... a lot.

Concern over growing income disparity has increasingly identified shifting earnings between income groups as the ultimate solution. While some argue that such a wealth migration would not have a negative economic impact, there can be no doubt of its budgetary impact.

If earnings shift from upper- to lower-income groups, they will produce substantially less revenue. The resulting serious implications for federal tax and budget policy provide a cautionary tale that how any income gap is closed is even more important than the closing itself.

Congress' nonpartisan Joint Committee on Taxation estimates that 1.1 million income tax filers will have $733.3 billion in income taxed at the top marginal rate of 35% rate this year. At the other end of the income spectrum, 62.4 million will have a 0% income tax rate.

Falling Revenue

Following the express desire of many to see a closing of the income gap between top and bottom earners at any cost, assume this $733 billion in income were to be earned instead by the 62.4 million nonpayers of income tax.

Further assume that these people had no other income and that this new income were evenly distributed between single individuals, heads of households and married people filing joint returns (all of whom have different marginal rate thresholds).

Each taxpaying unit would receive $11,747. Of the three filing groups, only single individuals would see any appreciable amount — less than a third — of their new income move as high as the next bracket (15%). Heads of households would see less than 3% of theirs move into the 15% bracket, and none of the married/jointly's income would move beyond the 10% bracket.

Taxed at the 35% rate, the $733 billion produces $257 billion in federal revenues. Redistributed to the current 0% group and taxed at the two lowest marginal rates, the same income produces just $78 billion — $179 billion less in revenue.

Broad And Flat

Certainly this hypothetical exercise makes assumptions affecting the revenue totals, but they largely cancel each other out.

On one hand, we assume the filers have no credits or deductions to reduce their taxable income (and further reducing revenue totals). The earned income credit is a case in point. None of these filers would move out of the EIC, and only single individuals would receive less than the maximum rate.

On the other hand, we assume that everyone in the 0% rate had no existing income — if they had, more income would have moved into the higher 15% bracket (producing more revenue).

Yet, even if these filers had been at the upper threshold of the 10% bracket, none would have moved beyond the 15% bracket. And even if all the shifted income were taxed at the 15% rate, it would still produce $147 billion less in revenues than in the 35% bracket.

Due to our progressive tax system, regardless of where this income shifts downward, it would produce less revenue. If it were reallocated equally to all five rate brackets below 35%, it would produce $94 billion less. If it were all allocated to the next lowest bracket, 33%, it would still produce $18 billion less.

If the disappearance of revenue seems far-fetched, then look at what has actually happened in another 35% bracket — corporate income. The Congressional Budget Office's latest 2008 budget analysis estimates corporate revenue falling 18%, or $66 billion, from 2007's. Granted it was not reallocated, it was "recessioned" — unearned due to a slowing economy — but it no less disappeared.

This hypothetical exercise in shifting income reveals serious policy implications. To recapture this shifted income's lost revenue, the tax system would have to broaden and flatten substantially, moving higher taxes down the income ladder.

It is a conveniently overlooked fact: The federal budget is very dependent on the "rich." Not only do the rich produce wealth that benefits the overall economy, but that wealth produces revenue in quantities other brackets currently do not. For this reason, the latest IRS data show that the top 10% of income tax filers pay 71% of all federal income taxes.

Dead Goose Of No Use

Social levelers are reminded to be careful of what they wish for. In their zeal to pluck the goose, they must be careful not to kill it. Despite the unapologetic and undisguised class warfare of many liberals, they are the most heavily dependent on the wealthy.

The absence of the wealthy would have a devastating effect on a tax structure liberals would like to see made more progressive, and on progressive social spending they would like to see increased.

The only viable path to reducing income disparity remains the same. To grow the wealth across the income spectrum, not see it vanish — or even shifted — from the top.

Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.