Paying for progressive proposals

This business, touted by people like Bernie Sanders and Elizabeth Warren, about paying for expensive new progressive programs (Medicare-for-all, forgiving College loans, “free” federally-funded college for all, etc) by taxing the rich and corporations more, needs to be examined a bit more.

Here is where federal taxes come from right now:

In 2018 the total income taken in by the federal government was $3.3 trillion. (total outflow was $4.1 trillion, with the difference made up by new borrowing). Payroll taxes (35% or $1.15 trillion) go almost entirely to pay for social security, Medicare and unemployment insurance, so the real total the government had available for the rest of its services, including military spending and everything else, was about $2.15 trillion (65% of $3.3 trillion).

Notice that corporate taxes now make up only 6% of the total revenues, a little under $200 billion. The vast majority of the $2.15 trillion annual federal income (not counting social security or Medicare payments) comes from taxing ordinary workers. And in fact the Medicare and social security portion is also partially paid for by taxes on individuals, taken out of their payroll.

We keep hearing about how corporations don’t pay their fair share and ought to be taxed more. True enough.  In 2018 Netflix, Amazon, Chevron, Delta Airlines, Eli Lilly, General Motors, Gannett, Goodyear Tire and Rubber, Halliburton, IBM, Jetblue Airways, Principal Financial, Salesforce.com, US Steel, and Whirlpool, among others, all paid no (zero!) taxes. Why? Because they can all afford to hire masses of high-priced and very competent lawyers and tax accountants to find every loophole and tax-avoidance scheme possible, and to “buy” with campaign donations favorable tax legislation. Meanwhile the IRS has had its budget cut repeatedly and doesn’t have enough auditors these days to even follow up on individuals who fail to file their taxes, let alone take on big corporations. (In 2010 they had 2.3 million such investigations. By 2017 it was down to just 360 thousand). My conclusion – the odds realistically that the federal government can significantly increase tax revenues from large corporations is very small, whatever campaign promises candidates may make. But even if the government succeeded in doubling the amount from corporations (highly unlikely), that only adds about $200 billion per year.

What about taxing the rich more? Rich individuals of course follow the same route – they too can afford to hire good lawyers and tax accountants to help them evade taxes, and the IRS is so strapped it has admitted publicly that it doesn’t have the staff or expertise to even try to untangle the more complex tax-evasion schemes the rich use.  Even so federal data shows that the top 1% (incomes over half a million a year), already pay about 39% of all individual federal taxes collected, or about $1.3 trillion of the $3.3 trillion annual total.  Realistically significantly increasing the taxes on the rich would probably not collect that much more income, because the incentive to avoid taxes would be sharply increased.

These back-of-the-envelope calculations suggest that, despite the populist proposals to tax the rich and the corporations more, realistically these expensive new programs would have to be paid for largely by the 55% of the population who make enough to pay taxes in the first place, and aren’t part of the top 1% and so can’t afford the expert tax-avoidance schemes. That 55% pay a little over $1.6 trillion in annual taxes. So if we wanted to absorb, say Elizabeth Warren’s additional $1.2 trillion a year (assuming my reduced $11-15 trillion over 10 years estimate, per my previous note) or so for Medicare-for-all, we would have to almost double the taxes on those people. And that doesn’t even include some of the other expensive proposals. I just don’t think that dog will hunt.

And notice that all this ignores the current federal deficit, which with Trump’s unwise tax cuts added on top of the deficits imposed by previous administrations is now topping $1 trillion a year this year. Of course the Fed can probably continue to sell bonds (ie – borrow more money) at relatively low interest rates for the foreseeable future because of all the capital flight to this country, driven by the economic and political unrest in the rest of the world. But if Peter Zeihan’s predictions are correct, the cost of capital will begin to rise sharply in a few years as the demographics shift and the baby boomers begin to retire, and the interest on the national debt (currently about 2.5%) may then rise sharply, with significant impacts on the federal budget.