Arithmetic: How to Fix the National Debt

Oct 3, 2012 in Feature, Opinion, New Tax Issues

We all heard or heard about Bill Clinton’s speech at the 2012 Democratic National Convention and his powerful statement that ARITHMETIC is what we need to use to balance the budget and combat the national debt. Once again, being accountants, we were intrigued by this notion! We know how to do arithmetic, so let’s see what it’s REALLY going to take to bail us out of this mess.

How much more income do we need?

If you read our previous blog about the budget deficit, you’ll see where we made the broad assumption that most government programs are necessary, and that on average, we can’t reduce the expense side of the federal budget by more than 10%. This leaves us with a budget deficit of 38%, or about .95 Trillion dollars. Let’s simplify that and call it a trillion. Our government needs to generate $1 Trillion dollars MORE income per year just to make ends meet. That doesn’t even reduce the national debt, it just keeps it from growing.

How much income does “The 1%” earn?

We’ve heard all the talk about “The 1%” and how they need to step up, and there may be some truth to that. But, that’s not the complete solution. There are probably a lot of ways to calculate who the top 1% of US taxpayers are. Adjusted gross income is an easy method… of course, it includes all of the income adjustments and it’s not a real measure of income. Based on 2009 figures CNN estimates the actual income of taxpayers in the top 1% of adjusted gross income ($343,927 AGI) to be an average of $960,000.  With inflation from 2009 to 2012, let’s call that a nice round $1 Million. And there are about 1.4 million US households that fit that bill. So, their total income = $1,400,000,000,000 or $1.4 Trillion. That’s not adjusted gross income, though. Rest assured that no matter what, there will be deductions to reduce that income by at least 50% (about 64% was the average for 2009). So, let’s say best case (for the government), 50% of that is taxable. That gives AGI for “The 1%” at a total of $700 Billion.

How much additional income can we get from “The 1%”?

So, how much tax does “The 1%” pay? Well, the highest tax rate since 2003 has been 35%. So, let’s just say we double that. Sound like too much? From 1936 through 1980, our highest tax rate was between 70% and 94%! The good ol’ days of the 1950′s? 91-92%. (source) So, an additional 35% tax on the $700 Billion AGI of “The 1%” gives us at most an additional $245 Billion. A tidy sum, and a nice start, but only about 1/4 of what we need to clear the deficit.

Just to be clear, we’re not suggesting that a family with a $1M income has to live on a mere $300k… That family is currently paying somewhere around $126k of taxes on their $360k of adjusted gross income. Limiting some deductions and doubling the tax rate could have them paying $350k of a $500k adjusted gross income, an actual tax rate of 35%, leaving them with $650k of their income.

Where will we get the remaining $755 Billion in required income?

Well, if we’re willing to double the tax rate of The 1%, perhaps we could do the same with The 99%? A little reverse calculation from the budgeted $1.165 Trillion in personal income taxes and $237 Billion in corporate income taxes tells us that if we raised the tax rate for EVERYONE across the board (the 1%, the 99%, and every business out there), we would not need to raise taxes by 100%. We’d only have to raise them by about 72% to reach our goal of $1 Trillion to balance the budget.

But, we still need to pay off the National Debt!

Great, we’ve balanced the budget. Now what do we do about that debt? We don’t want to just continue paying interest on it forever, assuming that’s even an option. We have $11.5 Trillion in debt! Let’s pretend it’s a mortgage. It would be reasonable to repay a mortgage in 30 years. So, let’s pay it off over 30 years. Interest is already accounted for (and we’ll ignore the fact that the amount of interest will decrease as the balance goes down), so we just need to pay an equal portion of the balance each year. That’s $383 Billion per year that we need, on top of the $1 Trillion that we need to balance the budget for a total of… $1.38 Trillion dollars.

And, if we raised taxes across the board for all tax payers (1%, 99%, businesses and all), that would require an increase of about 98.5%. Might as well call it 100%.

In Summary

The above rambling arithmetic shows that

  • Raising taxes on the 1% alone will NOT solve our deficit problem.
  • Raising taxes on EVERYONE by an average of 72% would balance the budget.
  • Raising taxes on EVERYONE by an average of 98.5% would balance the budget and pay off the National Debt in 30 years.

That’s what it’s going to take, folks! Talk of tax cuts at this point in time is just so much political smoke. It would be irresponsible to cut taxes for ANY group right now. And it’s pointless to point fingers and talk about who’s fault it is that we’re in this situation, the simple fact is, WE ARE! We have to fix it. It won’t be easy.

Realistically, if we are going to do the ARITHMETIC and get out of this financial mess, everybody is going to have to pay higher taxes and constantly hold the government accountable for its spending.  It is really sad that our younger working generations will eventually have to work harder than ever, live a minimal lifestyle and possibly have no retirement to pay for the mistakes that simple ARITHMETIC would have solved.

Contact Fredrick James Today to learn more about how you can reduce YOUR budget deficit in the face of federal taxes that are surely on the rise.

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