Sunday, October 01, 2006

Deficit reduction

Thanks to the tables Max references here I can make an estimate on what it would cost to balance the budget.

Max’s post is about the ridiculous comments made in the right blogosphere in response to these numbers. I’d like to point out that by my calculations, about 30% of income of all Americans not in the top bracket is taken by taxes if the 15% FICA is included (FICA is paid half by the employee directly and half by the employer directly making the cost of the employee all that much higher and therefore impacting salary). If the disproportionate effect of FICA on high incomes is taken into account (no income over $94,000 is taxed by FICA), people in the top bracket would also have an effective tax rate of about 30%.

Assuming away disincentive effects, removing the $94,000 limit would increase receipts by 120 billion and increase the effective tax rate (total adjusted income over tax paid) of the top bracket to about 42%. If we also increase the top two brackets’ marginal rates to 55% the marginal rate of taxation for the top bracket would be about 70% after including the expanded FICA and the effective rate would be about 55%, but we would get about another 130 billion on top of the 120 billion from increasing FICA. And if we eliminate the 10% and 15% capital gains brackets, moving both to 20%, we would get about 50 billion.

That would be about 300 billion without touching people who made less then $150,000 (except a few miscellaneous capital gains earners). The effective tax rate for people outside the top two brackets (people who make under $150,000) is about 16% not including FICA. If we increase that to 20% it would mean taking about a quarter more income taxes from the rest of the people; ten percent bracket would go to 12.5%, the 15% would go to 18.75%, and so on. This would increase the effective rate on people earning less then $150,000 to 34% and reduce the deficit by about 130 billion.

This all would leave about 40 billion in deficit, which seems like a reasonable amount to be able to cut from discretionary spending (most especially the bloated Bush defense budget). Note that all of this assumes away disincentive effects from increasing the top marginal rates. If indeed the increase in income inequality is due to increases in returns to education, then the disincentive effects will probably be small.


Blogger francois said...

Hold on a second. Bush has raised spending by $500 billion a year and you think only $40 billion of that can be rolled back?

I'll agree to a rollback of the tax cuts, but only if we also roll back the spending increases made since 2001.

9:50 AM  

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