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Sunday, June 5, 2011

Can taxing the rich solve US financial problems?

I have gotten into quite a few debates on how taxing the top income CANNOT alone solve US debt problems.

At a high level, this much I do know, about US budget in 2011. The budget is projected to be at 3.8 Trillion, with 1.5 trillion in DEBT spending. So how to close this gap?

The topic has been brought up "tax the top 1%"......so how much does the top 1% earn per year? In 2008, the top 1% eared 1.6 trillion. Now here is the trick...how much to tax the top 1%? First lets talk about the capabilities of this demographic. The richer you are, the more likely that person is a globe trotter. Such wealthy may have houses in multiple countries, and may even have ability to move to those countries (dual citizenship).

At top 1% of US earnings, it is safe to say, that the people are mobile and could just leave if pressed. So lets pick a nice, hard, percent that is draconian, but not unpayable.....say 50%.

Think about that, for every dollar they earn, take 50 cents. Thats pretty heavy handed. And lets suppose these people are nice, and stay in the USA and don't leave. Further, they take their savings and continue to re-invest with such stiff taxes.

I think these assumptions are ridiculous...but lets go with it.
So now the government is collecting 800 Billion from top 1%. Now the Budget deficit is 700 billion.
What to do now? I know, lets go after the entire top 5%. Lets have same assumptions, no body leaves, everyone continues to invest, and pay their taxes, and business level remains same. I don't believe, but lets run with that.

Top 5% total income in 2008 was 2.9 trillion. Of that take in taxes 1.45 trillion. Now we are talking! But wait, those people do pay taxes today....so how much is that? 605 million. OK, so take away 605 million from 1.45 trillion. and thats about 845 billion.

HMM, this isn't working out...we still can't close the budget deficit. I know, lets go to top 10%!
Their earnings total 3.8 trillion, 50% income, 1.9 trillion, minus taxes currently paid of 721 million, leaves about 1.2 trillion new money to cover US government budget. ugh! We still aren't over the line for paying US Debt for one year!

Lets go for it, top 25%, total 5.6 trillion, 50% taxed, 2.8 trillion, minus taxes currently paid of 890 billion equals 1.9 trillion! Woot! deficit covered.

So we can tweak the tax rate from 50%, to 45% to just cover the US budget deficit. Now those people can pay for state taxes, sales tax, etc. Not sure what the total tax rate then is, but I hazard to guess closer to 60%.

So lets see who these top 25% people are? Why they are people earning more than 67,000 dollars!

NOTE, none of this took into account increasing taxes on businesses. This was targeting individuals. I am sure between taxing the companies and people more, less draconian percentages than 45% can be done. But the purpose of this post is to put PERSPECTIVE on the numbers, and the more realistic solutions. America is already among highest tax rate for corporations, and they are mobile, and will leave.

So are you in favor of raising the taxes to pay for US annual deficit? If so, I encourage you to look at the numbers here and here, figure out what works. Also put your assumptions on how people will not alter their behavour and the tax rate can be maintained.

Then look at it, ask others, how realistic is it? Dare I say you will come to one conclusion.

The US MUST CUT BACK ON SPENDING! Period. End of story.

Now, lets go to crime scene number two. The banking industry. The US government has taken on Freddie Mac, Fannie Mae, and the Federal Reserve bank has been buying bad loans at face value. Throw onto the pile AIG, GM, Citibank, Bank of America, and others that have either taken huge money from US government or have been taken over.

Freddie Mac debt it holds is about 2.6 trillion. Fannie Mae has about 869 billion. The Federal Reserve Bank has purchased 917 trillion of what is likely, the worst debt available (pennies on the dollar).
Those three alone total 4.3 trillion. Throw on the government backing of debt from Citibank, AIG, Bank of America, and others, dare I say, its fair to guess 5.5 trillion (if not much more) is involved. Now this debt isn't worth zero, but I say its not accurate at fair value. If it was, the government could return to mark to market accounting practice as was in place from the Great Depression through 2008. So what is its true value? No one knows.

But lets assume that its worth 33% less than face, and eventually the US government will pay for it. Mind you, I think reality if 50% or more loss, but lets be nice, and say 33%. 5.5 Trillion = 1.8 trillion more debt.

And NONE of this includes the cost of future Medicare and social security payments.

Taxation will not, and cannot be the only solution, we must cut spending across the board, and stop playing pile on with private debt on the backs of taxpayers.

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