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.
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