Monday, April 18, 2011

Where the Money Is

Allegedly, when Willie Sutton was asked why he robbed banks, he replied “That’s where the money is.”

This is pertinent to tax policy, and public opinion. Many people believe the rich should be taxed more. Fair enough. But, some people also think this will “solve” our government’s chronic shortage of cash. This is not the case.

The problem is that the distribution of income – while positively skewed, does not have a thick tail on the positive side. Rich people are indeed very rich, and might be able to pay more, but there aren’t that many of them to make a big dent in our federal budget.

The chart below appeared in the piece entitled “Where the Tax Money Isn’t” in the April 16th issue of The Wall Street Journal.

For comparison purposes, our Federal budget is in the neighborhood of 4 trillion dollars. Looking at the chart, if we completely confiscated all income earned by people making more than $200,000 per year, it would total up to … about … half of that Federal budget. Going further, and taking the next group – the one that includes my two full-time faculty household still wouldn’t cover the Federal budget.

Now, to be fair, this is taxable personal income – so it doesn’t add up to the entire GDP of the U.S. Perhaps half of GDP is not included in this chart, so my argument isn’t as sound as one might think at first glance.

Even so, there isn’t any sense in which the Federal government gets a large share of its revenue from sources outside of personal income. Yes, businesses get taxed, but on their taxable income, and not on their value added. And that value added is the major component of the GDP that is not shown above.

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