New Report: The Limits of Taxing the Rich

Even the most ambitious proposals could not finance spending expansions

New York, NY – This year, the federal budget deficit is projected to nearly double, reaching approximately $2 trillion. Over the next three decades, it is projected to rise to 10% of GDP. These deficits will only grow if Congress continues enacting tax cuts and spending expansions, leading some to promote “taxing the rich” as a solution. In a new Manhattan Institute report, senior fellow Brian Riedl examines this tax-the-rich answer to the problem of federal budget deficits, finding that while there is room to raise some revenue from corporations and wealthy families, the plausible revenue estimates fall far short of closing budget gaps.

Riedl demonstrates that even an aggressive tax-the-rich agenda could raise at very most 2%—though realistically closer to 1%—of GDP. This would have sufficed to resolve most of Washington’s fiscal problems in decades past, but the cost of more recent progressive spending proposals mean that even the optimistic 2% wouldn’t come close to filling the budget gap. Ultimately, the mathematical limits of taxing the rich should motivate policymakers to broaden their deficit reduction targets to include spending savings and even middle-class taxes.

Riedl’s report also answers common progressive talking points, including:

• Senator Bernie Sanders’ tax agenda: Progressives often claim that Sen. Bernie Sanders has unlocked a massive bounty of potential tax rich targets, but a closer examination of his tax proposals does not reveal plausible revenues exceeding the 1% to 2% of GDP estimated in this report.
• Following Europe: European social democracies are not the tax-the-rich utopia that progressives often claim. America’s upper-income and corporate tax rates and revenues roughly match those of Europe, where the higher overall tax revenues are overwhelmingly driven by steep value-added and payroll taxes targeting the middle class.
• The 1950s and 1960s tax rates: The oft-cited 90% income tax rates of the 1950s and 1960s included an extraordinarily small number of taxpayers and raised miniscule levels of additional tax revenue. The 1950s through 1970s income tax revenues were lower as a share of the economy than in the post-1980 period of lower top income tax rates.

Read the full report here.