The budget impasse and the approach of Tax Day brings us to a perfect storm on government spending, and we’re hearing the same tired refrain that we have heard for the last several decades of progressive taxation — which is that taxation isn’t progressive enough. We need to Soak the Rich to solve our budget woes, the Left cries, and attacks anyone who disagrees as lackeys of the Koch brothers or fat cats themselves. Reason TV presents the case for reality, which is that the problem of massive deficits did not come from a reduction in the share of GDP that goes to the government, but the share of GDP that the governments spends regardless whether it receives it or not:
And bitching and moaning by those at the top of the income pyramid about how they aren’t forced to pay more in taxes. Secretary of State and cattle-futures queen Hillary Clinton, super-investor Warren Buffett, and best-selling author Stephen King have all recently carped about how rich folks like them should be paying more in taxes. King recently told a Florida rally, “As a rich person, I’m paying 28 percent in taxes. What I want to ask you is, Why am I not paying 50?”
Such rhetorical questions miss the point when it comes to the country’s balance sheet. The U.S. doesn’t have a revenue problem or a tax-rate problem. We’ve got a spending problem. Since 1950, revenue from all sources has averaged around 18 percent of Gross Domestic Product, despite top tax rates that have fluctuated from over 90 percent to the high 20-percent range. So despite all efforts to jack up revenue (or reduce it), that’s what the government can expect to work with. Yet spending has averaged about 20 percent of GDP – and is currently at a whopping 25 percent of GDP, a figure not seen since World War II. President Obama’s budget plan forecasts spending at 23 percent of GDP over the next decade while Rep. Paul Ryan’s GOP plan calls for 20.5 percent. There’s your deficit right there, folks.
But King, Clinton, and Buffett can always pay more in taxes to retire federal debt held by the public. Just go to http://treasurydirect.gov and make a voluntary donation to reduce the national debt held by the public. So far in calender 2011, Treasury has pulled in an $125,000! Which means there’s only about $8.99 trillion to go.
Besides, the more progressive an income-tax becomes, the more unstable the revenue it produces. All one needs to do is look at California to see the results when the economy takes a downward turn. Tax systems that rely on heavily-graduated income taxation, especially on capital gains, will see sharply lower revenues during recessions and stagnation. (They also discourage investment, which also produces downward pressure on revenues.) Pushing to make the tax system even more punitive to income — which is separate from wealth, as people should know — will erode both wealth and income in the long run.
If we want to solve our myriad tax-system issues, that would be a welcome project. But the massive deficits we’re experiencing are a direct consequence of taking budgets from $2 trillion in FY2000 to $3.7 trillion in FY2010, most of which occurred through entitlement programs that badly need reform.