WSJ’s Wessel on the Deficit and Taxing the Rich

The Wall Street Journal’s David Wessel has a useful column looking at whether and how much tax increases on the well-to-do would be able to close the estimated $9 trillion budget gap over the next decade.

Not much, actually. Wessel reports that to close that gap by taxing those couples earning more than $250,000 a year (Obama’s campaign pledge, for what that’s worth) would require raising their effective federal tax rates to a whopping 69 percent, from just 31 percent today. And that’s just the effective rate—the marginal rate would have to be much higher than that.

This is a country that until 1982 had a top nominal tax rate of 70 percent, but even then the effective rate was less than half that as the system was riddled with loopholes and outright evasion.

So it’s not going to happen and it’s not going to get close to happening.

But Wessel points out—and remember, this in the pages of The Wall Street Journal—that raising taxes somewhat on the rich won’t hurt the economy.

Two, “the rich” do have a lot of money, even after the bust, and raising their taxes would raise significant sums without hampering the economy.

He notes that tax rates for top earners were higher during the Clinton Administration, something that didn’t exactly stifle economic growth then.

And there’s a good case to be made that the rich aren’t exactly getting soaked by the current tax system. Sure, the top 0.1 percent of earners pay 10.8 percent of all federal taxes—a nifty statistic used by folks like the WSJ editorial page to rant against taxing the rich. But that top 0.1 percent earns 7.1 percent of all the nation’s income, something said edit page seems to always neglect to mention. Or to put that stat another way, 1/1000th of the population gobbles up one-in-fourteen dollars made in the U.S.

Look at the top 5 percent of earners and the tax burden is even less dramatic. They take home 13.5 percent of all income and pay out 17.4 percent of all taxes. So it appears there’s plenty of room for higher earners to pay more.

But according to Wessel, raising the top two tax rates only garners about $99 billion in new revenue for each percentage point increase in the marginal rate, which is the percentage taken out of the last dollar earned (effective tax rates are always lower). That means raising them ten points, which seems unlikely, would shave less than $1 trillion off the deficits. That in itself would violate Obama’s campaign pledge because the second-highest tax rate applies to couples earning more than $208,850.

So Wessel is right to say that some combination of higher taxes on people Obama pledged not to increase taxes on and new spending cuts (especially on entitlements, which are responsible for most of the $9 trillion) will be required to shrink the deficits.

Remember, they don’t have to go to zero. We’ve almost always run deficits, and even taking it down by a third or half would return it to somewhat normal levels (note this link is to a chart that doesn’t reflect the most-recent increases in the deficit projections. I’m pointing to this for the historical data) relative to GDP.

And budget-deficit projections are just that—projections.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.