Can we close the budget deficit by taxing the rich?

In my chat yesterday, someone asked if we could really eliminate the budget deficit by taxing the rich. The answer is no, but we could make it smaller by taxing the rich. The Wall Street Journal's David Wessel runs the numbers. Before we jump in, remember: The deficit over the next 10 years is projected to be $9 trillion.

Start with some rough arithmetic. The three million or so fortunate taxpayers whom Mr. Obama counts as rich are projected to earn about $27.5 trillion from 2010 through 2019, according to the Tax Policy Center, a Washington think tank, and about $23.9 trillion after deductions. They are projected to pay $7.4 trillion in taxes. That's 31.1% of every dollar of taxable income, on average. To squeeze an additional $9 trillion out of these taxpayers would require boosting that to 68.9%. And that assumes these taxpayers wouldn't find tax shelters to hide their income or work less. There isn't enough money in the over-$250,000 crowd to stick them with the $9 trillion tab.



And this actually makes taxing the rich look better than it is. The deficit that people worry about isn't the $9 trillion short-term budget deficit. It's the mega-trillion long-term deficit. To put this in context, the 2009 deficit was 53 percent of GDP. The 2050 deficit is projected to be 350 percent of GDP.

What's driving this, as you've heard at length, is health-care costs and demographic changes. The CBPP has a nice primer if you want to dig into it. But health-care costs and demographic changes are happening way faster than wage increases. There's no tax regime in the world that can keep up indefinitely.

Another way of putting this: I've heard Tyler Cowen say that he asks conservatives when they'll support a VAT. It's easy (at least in theory) to support deep spending cuts in year one and year two and year three and year four, but straight cuts through to year 40? And beyond? Eventually, you need revenue. And I'd say the same goes for liberals: You can raise taxes on the rich in year one and year two and year three, but in year 40?

Eventually, we're just going to have to get the growth of health-care costs down. There's simply no other way.

Table credit: Wall Street Journal.