Can Only Taxing Income Over $250,000 Pay Off Our Debt?

President Obama has pledged not to raise taxes on individuals who earn under $200,000 a year or on couples earning under $250,000. It seems highly unlikely that the President will support enough in spending cuts to make this promise realistic (see here and here).

Ezra Klein over at the Washington Post recently featured some numbers put together by the Tax Policy Center and the Wall Street Journal. They estimate higher-income individuals and couples will make about $24 trillion in taxable income between 2010-2019. About $7.5 trillion of that will go to federal income and payroll taxes -- perhaps a bit more with the health care bill in place. On top of that, we estimate about $2 to $3 trillion would go toward a variety of state and local taxes. All said, these high earners will have about $14 trillion in remaining taxable income over the next decade. (That $14 trillion number includes not only the income above $250,000 -- but the income below that threshold, from higher earners.)

Individuals Earning Above $200,000 and Couples Earning Above $250,000

2010-2019 ($ in trillions)

Projected Taxable Income $24 trillion
Projected Federal Taxes $7.5 trillion
Projected State and Local Taxes (Assuming roughly 10% rate) $2.5 trillion
Remaining Taxable Income $14 trillion

The higher the taxes levied on this income, the more it will shrink. For one, taxpayers would use new and existing means to hide their income -- labeling themselves as businesses, doing their banking offshore, spending their money on tax-preferred activities, gifting their money to lower earning family members, accepting more income in the form of fringe benefits, etc.

On top of that, higher tax rates cause real change in economic behavior. As the government lays claim to higher percentages of earnings, incentives to work, invest, and innovate are decreased and the whole economy suffers.

In a static analysis which excludes the effects we described above, TPC finds that the top two rates would need to increase to 72 and 77 percent just to get the deficit down to 3 percent of GDP by 2019. And these rates would have to get even higher after 2019; the fiscal situation is projected to get a lot worse after that.


The bottom line is that we can't solve our fiscal problems solely on the backs of high earners.

And in order to help paint a realistic picture of what will be involved, now should be the moment for politicians to make promises about what they will do; not what they will not do.