When I started the research for my Eat the Rich column a couple of weeks ago, I thought it would be a broader replay of the first one I wrote in 2010. In that column, I suggested that our government could dine on the Forbes 400 and take all their wealth. Then I demonstrated that our government could blow through every dime of wealth the 400 possessed in a matter of months.
Talk about killing the Golden Goose.
And there would still be a massive deficit. So eating the rich might not be such a good idea.
But the landscape changes when you expand your view from the fabulous wealth of the Forbes 400 to the impressive income of the top 1% of earners. That group, about 1.4 million households in 2016, collected a stunning $25.4 trillion between 2001 and 2016.
The income (not wealth) threshold for entry into this group was $480,804 in 2016. This is chump change for the Forbes 400 but high on a whole herd of hogs for people who actually work for a living.
The total income of the 1% was high enough to pay taxes averaging about 26% of their income, according to IRS data. The remaining cash would cover the entire deficit during the period (about $9.3 trillion) and still have a hefty sum left over, about $9.9 trillion.
Viewed another way, if the top 1% had paid an average tax rate of about 63% over the period, government spending would have been covered. There would have been no federal deficits. Federal debt would be about where it was at the turn of the century.
Isn’t that a nice thought!
Yes, a 63% average tax rate may seem punitively high, particularly to the people who would pay it. Still, it should be noted that it is far more civilized than eating the rich after taking all their money.
A historical note may also be helpful. We had our highest marginal tax rate, a whopping 90%, when Dwight Eisenhower was president. In spite of that, he was a Republican, not a close relative of Chairman Mao.
There’s a big difference between a marginal tax rate and the average tax rate on the same income. My bet, however, is that the Big Dogs were paying out close to an average 63% back then.
The nation survived. Many even called it great.
Beyond that, why limit high tax rates to the top 1%? They aren’t the only folks with relatively deep pockets. And if you spread the high tax net out to other big earners, the top average tax rate goes down pretty dramatically.
I was until I made the calculations:
- Have a high enough tax rate to cover the deficit on the top 2% of earners, and the average tax rate on the group drops to 55%.
- Have a high enough tax rate to cover the deficit on the top 3% of earners, and the average tax rate drops to 50%.
- Do the same on the top 4% and 5% of earners, and their average tax rate drops to 47% and 44%, respectively.
As a practical matter, that’s about as far as you can go with higher taxes before you collide with the largest tax most Americans pay, the employment tax. The threshold for being a top 5% household was $107,653 in 2016. That’s well below the wage-base maximum for Social Security. So an increase in federal taxes would mean a total tax burden of around 60% for those at the bottom of the top 5%.
That’s probably a nonstarter.
They can work it out
So what have we learned?
First, the top 5% now collect about 35% of all income. So the money is there to cover the deficit spending and avoid putting our country — and our kids — further in debt.
Second, the biggest barrier to doing anything is the multiplicity of taxes we pay. And the employment tax is the biggest problem.
This is all “back of the envelope” figuring from a lowly journalist, so I don’t expect you to buy this idea. So let me suggest this. My people will meet with your people. They can work out the details and solve our tax and deficit problem.
Sadly, my people are a bunch of dogmatic, inflexible politicians.
So are yours, whatever your party choice.
Scott Burns is the creator of Couch Potato investing and a longtime personal finance columnist for The Dallas Morning News. Visit his site at couchpotatoinvesting.com. Twitter: @scottburnsSAL.