The "Balanced Approach" To Deficit Reduction

Here is Francesca Chambers of Red Alert Politics reporting on President Obama's recent statements to the effect that the American public, by re-electing him, has given him his mandate to raise marginal tax rates on the "rich" (I prefer the term "high earners").  This is all a part of the "balanced approach" to deficit reduction -- to reduce the deficit, you need "balance" between  spending reform and revenue increase.

Ms. Chambers challenges the president's math as to whether he really got a mandate.  I challenge his math as to whether any conceivable program of tax increases on high earners can make even a dent in the deficit problem.

Here's my math.  In year one, the restoration of Clinton-era marginal tax rates on taxable incomes above $250,000 is thought to be likely to raise around $42 billion, per CBO figures reported at Political Carnival here.  The projection/guess is that that figure will then go up  modestly with economic growth in succeeding years, maybe by $10 billion per year.  That's how they get a figure of $1 trillion over 10 years.

OK, here's what happens with Medicare/Medicaid over the same time period.  In year one, they are up $50 billion, just the one-year increase eating up more than the entire yield of the tax increase on the high earners.  In year two, M/M are now up $100 billion over today's base; the tax increase on the high earners yields $39 billion for that year above today's base, per CBO.  In year three, M/M are up $150 billion over today; the high-earner tax increases yield $64  billion extra.  In year 4, M/M are up $200 billion; the tax increases yield $75 billion.  Year 5:  M/M up $250 billion; tax increases yield $87 billion.  Continue for as long as you can stand it.  It gets worse and worse every year.

Did you notice that I wasn't even compounding the M/M increases? I was just adding a flat $50 billion per year, which is the projection for next year.  In any self-respecting Ponzi scheme like M/M, the increase compounds.  At 7% CAGR, a $50B increase this year becomes $53.5B in year 2,  $57.25B in year 3, $61.25B in year 4, $65.54B billion, and so forth.

So to keep up with the M/M increases using only income tax rate increases on the high earners, you would need to increase the rates not by 3%, but more like 5%, and not just one time, but every year.

  36% this year, then 41%, then 46%, then  51%, then 56%, and so on.  Since we're starting at about 36%, in 13 years we'll be past 100% tax rates on income above $250,000.  And don't mention that to New York State and City -- they think they get 12% of your income.  If you concede them the 12%, New Yorkers will be past 100% income tax rates in 10 years.  What's your plan for year 11?

Nothing about this is really much different from Madoff.  The math is the math.  The only thing that counts is ending the inexorable auto-pilot geometric increases in the big entitlements.  Whether or not you think that tax rate increases on high earners are a good thing, or whether you think that they ultimately hurt the low earners by degrading economic performance and decreasing opportunity, it is still indisputable that as long as the big entitlements are on auto-pilot geometric growth, such tax rate increases are a complete drop in the bucket.

Has President Obama actually thought this through?  To the extent he has any plan at all, I think it's something like, I can keep this thing going for another four years, and after that it's not my problem.  Or, perhaps, this math is too hard for me, but I really want to punish the successful for their success, so I'm going to do it.