As Congress wrestled with the debt ceiling this summer, many commentators argued for tax increases, and specifically for the wealthiest Americans to pay more. One would think the federal government could eliminate its red ink by raising taxes modestly on the rich or superrich. But it just ain’t so.
The wealthiest Americans already pay a huge amount in taxes. In 2008, the top 1 percent of households paid 38 percent of all federal income taxes (http://ntu.org/tax-basics/who-pays-income-taxes.html). A second reason taxing the rich won’t work is because government spending dwarfs the wealth of the richest Americans. Even taxing away all of the wealth of the nation’s billionaires would fund the federal government for only about four months.
To arrive at this figure, I consulted Forbes’ list of the 400 wealthiest Americans for 2010 (http://www.forbes.com/wealth/forbes-400). The threshold for making the top 400 was $1 billion in wealth, so this serves as the billionaires’ list. Forbes estimated each of these individuals’ wealth, and the 400 billionaires together had a net wealth of $1.37 trillion, led by Bill Gates at $54 billion. These estimates will contain some errors, some of which will cancel out, so I use this total net worth estimate.
Four Months of Government
Federal spending in fiscal year 2011 was $3.82 trillion, or $10 billion per day. America’s billionaires are very wealthy, but all of their wealth would keep the federal government going for only 131 days, or a little more than four months.
Taxing away all of the wealth of America’s billionaires would come close to eliminating the federal budget deficit—but just for one year, and it could only be done once, as afterwards the billionaires would no longer be billionaires or even millionaires.
Taxing the billionaires’ income instead of wealth could be sustained over time, but it would yield only a fraction of this amount in revenue, only enough to fund the federal government for a matter of days.
Expanders of Innovation
Taxing away the billionaires’ wealth wouldn’t be a wise policy even if it could balance the federal budget. Although one might guess the ranks of America’s billionaires are full of old-money Rockefellers, Fords, Kennedys, and Vanderbilts, many of the nation’s wealthiest citizens have earned their wealth from relatively new companies that have changed the shape of the U.S. economy over the past several decades, led of course by Bill Gates and Microsoft.
Wal-Mart built the fortunes of three of the richest 10 Americans. Other billionaires have earned their fortunes building companies such as Apple, Dell, Nike, Oracle, Google, Facebook, and Home Depot. Their wealth helps them continue to expand these (and other) businesses, benefiting of all of us.
Proposing to solve Washington’s deficit woes by taxing the rich may win applause. The reality is that the federal government’s addiction to spending is a habit even the wealthiest Americans cannot afford to support for long.
Daniel Sutter ([email protected]) is professor of economics at Troy University’s Johnson Center for Political Economy.