Would Taxing the Rich More Fix the National Debt?

At more than $34.3 trillion, the fact the national debt is truly a national liability is becoming hard for politicians to hide. Especially since paying the interest owed on the national debt has become the fastest growing major category of government spending.

The same politicians responsible for running up the national debt are now trying to sell their solutions for fixing the nation’s fiscal problems. “It’s easy,” they say. “We won’t ever have to do anything to fix it that will hurt you!” And then they trot out their latest poll-tested proposals. Here are two very common pitches they make:

• “We can grow our way out of the problem!”
• “We can tax the rich more to fix the problem!”

Both these ideas are political snake oil. The idea that faster economic growth can make the national debt manageable was shot down by recent research. Not long after, so was the idea that only taxing the rich more to fix the nation’s fiscal problems could do the job.

Why wouldn’t taxing the rich more work?

Writing at the Wall Street Journal, Manhattan Institute senior fellow Brian M. Riedl summarizes why proposals to tax the rich are doomed to fail in today’s fiscal climate:

As budget deficits surge toward the stratosphere, Congress will soon have to get serious about savings proposals. Yet reforming Social Security and Medicare—the leading drivers of long-term deficits—remains a political nonstarter. Neither party is willing to raise middle-class taxes. And cutting defense and social spending would save at most $200 billion annually from deficits that are projected to approach $3 trillion by 2034.

That leaves one option: Tax the rich. It won’t be nearly enough.

There are a few excessive tax loopholes and undertaxed corporations that lawmakers could address. It’s farcical, however, to suggest that the tax-the-rich pot of gold is large enough to rein in our deficits and finance new spending programs. Seizing every dollar of income earned over $500,000 wouldn’t balance the budget. Liquidating every dollar of billionaire wealth would fund the federal government for only nine months.

In a study for the Manhattan Institute, I set upper-income tax rates at their revenue-maximizing level, while paring back tax loopholes and fighting tax evasion. As background, the Congressional Budget Office projects that our budget deficits—which currently exceed 7% of gross domestic project—will surpass 10% of GDP over the next three decades. My research shows that the “tax the rich” model would raise at most 2% of GDP in additional revenue over the long term.

Riedl’s argument boils down to elementary budget math. Even if Uncle Sam taxed every “excess” dollar earned by the rich, what it would collect falls far short of being able to fill the budget gap. Without seriously restraining its growth, the federal government’s projected spending will still outpace its revenue by a vast margin.

That’s not the only problem with such a tax policy. But it is enough to discard it as a failure out of the gate. As a policy, it’s something only a snake oil-selling politician can love.