The Ben Bernank will be giving a press conference today. This is the first that a Fed Chairman has ever given. Probably a good thing, but I don’t actually expect him to say anything that isn’t already known by Fed “Watchers”. The Caesar Rodney Institute has a new post on S&P’s downgrade of their opinion of America’s future debt obligations (Note: They did not downgrade America’s debt, just issued a warning about the future).
So, how will the “tax the rich” thing work out:
The top 10% of all households by income have an effective Federal income tax rate of 19% and pay 70% of all Federal income taxes. (The effective tax rate on the bottom 50% of households is 2.6% and they pay approximately that proportion of all Federal income taxes.) If the effective tax rate on the top 10% is raised to 50%, the revenue generated would eliminate the projected FY12 Federal deficit of $1.2 trillion and reduce the gross debt by 8%. But taking away 50 cents of every dollar earned by these households will certainly take away their incentive to continue to generate income and curb their ability to save.
Even worse, to pay the additional tax will require removing invested capital from their investments. Less investment capital means less job growth — or worse, job contraction. With 20% of Delawareans income coming through federal transfer payments (social security, medicare, medicaid, unemployment, etc.), reducing private sector employment to pay our current bills will just raise the need to pay future bills. This is what they call a downward cycle.
It is not time to hassle over whom is to blame for our predicament. Both Republicans and Democrats have dug this hole, as have entitlement addicted citizens from all walks of life. Driven by constituents, politicians tend to vote for spending programs and against taxes to pay for that spending. Citizens are happy to go along for the ride. Their individual votes become claims against the total income earned by all people in the country.
Should every senior receive free medical benefits regardless of ability to pay? Should folks receive unemployment benefits for more than a year? Should Federal tax write-offs subsidize the building of McMansions? Everyone has to share in the expenditure cuts. After looking at 200 years of U.S. fiscal history, economist John Wallis concluded that “there is no substantial evidence to suggest that tinkering with the revenue structure will change the size of government.”
It has been discouraging and alarming to see the herd mentality of “getting something for nothing” that has gradually surged over the past ten years. Thanks go to S&P for telling us that the emperor has no clothes…