Taps Coogan – March 24th, 2021

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The ink isn’t dry on the latest $1.9 trillion stimulus bill and we are now launching into discussions on a multi-trillion dollar ‘infrastructure’ stimulus bill. The price tag for that infrastructure bill looks like it might be as high as $4 trillion.

Some people are suggesting that we can pay for that infrastructure bill, and other deficit spending, by simply raising taxes on companies and ‘rich people.’ We can’t. It’s not even close.

Federal Revenues

In fiscal year 2019, when the economy was strong, unemployment was at a 50 year low, and real wages were surging, the federal government collected a near record $3.464 trillion of taxes. That revenue came from four major sources: income taxes ($1.718 trillion), payroll taxes ($1.243 trillion), corporate taxes ($230 billion), and $273 billion from a combination of tariffs, excise taxes, estate taxes, interest on Federal Reserve deposits, and other miscellaneous sources.

The tax hike proposals that have recently been floated include raising the top income tax rate from 37% to just under 40%, raising the corporate tax rate from 21% to 25% (or 28%), and taxing long term capital gains at 40% instead of 23% on high income earners (or people selling their homes or small businesses).

How much revenue is that going to actually raise?

To make the math simple, lets assume that raising taxes doesn’t reduce growth and doesn’t lead to any tax avoidance strategies, or market selloffs that negatively effect taxable gains.

Here are the back-of-the-envelope numbers:

Corporate Taxes: All things being equal, raising corporate taxes from 21% to 25% in 2019 would have raised about $44 billion. It would also bring the US corporate rate above the global average, Raising the rate to 28% would raise about $77 billion and give the US the highest corporate rate in the developed world when combined with state taxes.

Top 1% Taxes: The top 1% pay about 37% of income taxes. If we assume that their income is entirely from earned wages, raising the marginal tax rate on income over $422,000 (the demarcation of the Top 1%) from 37% to 40% would raise roughly $35 billion (figures in the calculation taken from here).

If we assume that 100% of the Top 1%’s income is being taxed as long term capital gains at 23% and you taxed all income above $422,000 at 40% instead, it would raise roughly $195 billion a year, assuming no tax avoidance, economic impact, or market impacts.

In total, the corporate and ‘rich people’ taxes on the table are likely to raise somewhere between $79 billion and $272 billion a year assuming no tax avoidance, economic impact, or market impact. The difference between those two numbers depends on how much personal income you assume is currently from long term capital gains versus short term gains & salaries and whether the corporate rate is raised to 25% or 28%. The real number is probably something like $175 billion in present day revenue, which would need to be indexed for growth and inflation in future years.

Reality Check

The CBO estimates that the federal deficit for fiscal year 2021 will be $2.3 trillion excluding the $1.9 trillion stimulus bill and any infrastructure spending or other stimulus that follows this year. So, the national debt is likely to expand by at least $4.2 trillion this year. That’s before starting into infrastructure spending. The national debt grew by $4.23 trillion in fiscal year 2020. The combined increase in the national debt in 2020 and 2021 is likely to be $8.4 trillion before infrastructure.

The interest expense on $8.4 trillion at today’s rates (~1.5% for the 10-year) is about $126 billion a year. In other words, the proposed tax increases will barely cover the interest expense on the debt that we’re likely to add in FY 2020 and 2021. Again, that’s before getting into infrastructure spending and assuming that interest rates don’t rise further, which they are busy doing.

There is a popular notion that by just enacting a few taxes on ‘greedy’ corporations and ‘rich people’ we are going to be able to pay for the absolutely reckless, partisan, run-away deficit spending coming out of Washington. That is a bald-faced lie. Financing what is likely going to be an increase in debt equivalent to nearly 50% of GDP in just two years is going to completely transform the nation. That spending will extract its pound of flesh from everyone, either through taxes or inflation.

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