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WSJ Edit Page Disproves Own Point

A recent Wall Street Journal editorial, echoing Paul Ryan, asserts that you can't eliminate the deficit just by taxing the rich because the rich don't have enough money. The editorial winds up proving the opposite point. Follow the bouncing ball:

Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is.
Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

So the Journal's argument is that reducing the budget deficit by $938 billion a year is not enough deficit reduction? $938 billion is "sand on the beach" compared with a $1.65 trillion deficit? I'm not familiar with the "sand on the beach" metaphor, but unless it means "the clear majority," it's not a good metaphor. Of course, sand does in fact constitute a large share of the beach, so maybe that's what the Journal is saying here, but it totally undermines the editorial's thesis.

It's true that it wouldn't have closed the deficit right now, in the midst of the economic crisis. But it would be more than enough to do the trick within a couple years:

And keep in mind that the income from the top 1% will continue to grow, meaning it would easily top a trillion and then keep rising. We'd be running a surplus. We could kick back some of the money to the rich folks. No sweat!

The Journal proceeds to try the same exercise for 2005:

In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.

Notice the sleight of hand here. They're comparing the income of the over-$200,000 set for 2005 and comparing it not to the deficit -- it is way larger than the deficit -- but to the cost of running most of the government. But we don't need the rich to fund all of Medicare, Medicaid and Social Security. Other folks earn money, too. Nobody is proposing to eliminate their taxes. Moreover, the Journal is comparing revenue from 2005 with outlays in 2012 and 2016. And, yeah, it's always hard to pay for today's government with a tax base from the smaller economy of ten years earlier.

To be clear, nobody is proposing a 100% tax rate on the rich, or anything close to it, and nobody believes that such a tax rate wouldn't severely depress the income base. The point is that the arithmetical illiterates at the Journal set out to prove one point and wound up proving the very opposite. I don't know who wrote this particular editorial, but the method of setting out to prove a point, using a series of obvious statistical fallacies to cheat, and then proving the opposite of your point anyway without realizing it is a trademark of Journal editorial writer Stephen Moore.

If you're curious as to the actual effect of the Journal's thought experiment, Jeff Sachs runs the numbers. Short answer -- the Journal is so wrong here it's not even funny:

Consider the top 1% of taxpayers. Even in a year that the Wall Street Journal acknowledges "was a bad year for the economy and thus for tax receipts," the top 1% reported to the IRS an Adjusted Gross Income (AGI) of $1,685 billion dollars, amounting to 20% of the total reported household income that year, and around 12 percent of GDP. On this sum they paid $392 billion in taxes, an average tax rate of 23%.
The Journal writes that it is impossible to get enough income out of the top 1% to close the deficit, and invites us to undertake the "thought experiment" of taxing all of the income this group. In other words, the Journal claims that even the total income of the richest taxpayers wouldn't close the deficit. This claim is nonsense.
If the tax rate were 100% rather than 23% (and assuming in the Journal illustration an unchanged AGI), the extra revenues would be $1,300 billion, or 9 percent of GDP. Even allowing for other taxes already paid by the richest 1%, the incremental federal tax revenues would be at least 6 percent of GDP. Since every baseline scenario by the Congressional Budget Office and the Office of Management and Budget shows a deficit between 2013 and 2021 that is less than 6 percent of GDP, the total income of the top 1% would close the budget deficit entirely.
With great bravado, the Journal claims that even the income of the top 10% of the taxpayers wouldn't close the deficit. The top 10% reported $3,856 billion in AGI, equal to 46% of total reported income in the United States, almost 27 percent of GDP. On that, they paid $721 billion in personal federal income taxes, or an average of 18.7% of income. If the remaining 81% of income were paid in federal income taxes, the increment in tax revenues would be more than $3,100 billion, or roughly 21% of GDP. The budget deficit would obviously be closed many times over.

Actually, it is pretty funny, but tastes differ.

There's always a problem involved in wasting one's time examining very bad arguments. But organs like the Journal editorial page -- which just won a Pulitzer Prize! -- are influential and prestigious. I think very few people realize that these people are just pure clowns. They're not messing up complex economic theories here. They're messing up basic arithmetic.