How to Balance the Budget and Reduce Inequality
Tax the rich. That's where the money is.
For the last 50 years the federal government has been enacting budgets that authorize new spending but not the income necessary to fund it. And year after year the result is predictably the same, a federal deficit and an increase in the national debt.
How can this happen in the wealthiest country in the world? And especially when our government struggles to provide public services that are common in other wealthy countries?
The fact is that the problem is not difficult to solve, but it will take politicians who are willing to do their job. Here’s how.
1. Pay Our Bills
Congress is responsible for the federal budget, both spending and income (mostly via the income tax). This means that congress is solely responsible for any budget deficit.
For instance, the 2024 federal budget authorized $6.8T in spending. This would require $6.8T in income, but the government only collected $4.9T. This means that there wasn’t enough income (taxes) to pay for the authorized spending. If we truly want to eliminate the deficit the solution is simple and completely within the power of the Congress. Enact a balanced budget where authorized spending is funded via adequate taxation. In short, pay our bills and stop the annual charade of passing popular legislation that costs money and then refusing to pay for it.
2. Fund Social Security and Medicare
Currently Social Security and Medicare show up on the Federal Budget as 35% of total expenses. But these programs are intended to be self funding via a payroll taxes and the Social Security Trust Fund. They should have no effect on the federal budget or income tax. But years of easily corrected shortfalls and congressional inaction has resulted in depletion of the trust fund and now Social Security is projected to run out of money in the next few years. With no changes the result will be a reduction in payments. Once again the US Congress is responsible. Either fix the program or let it fail and suffer the wrath of voters. Don’t allow the shortfall to add yet another line item to our annual deficit.
3. Tax Assets, Not Wages
Government isn’t free so governments need a source of funds. Ideally that funding would come from all residents who benefit from the government’s services. Today that system is the federal income tax. But is taxing income the most equitable way to raise funds? For a majority of the population income is earned by work and is a poor measure of ability to pay. Here’s why…
In 2024 the median household income in the US was about $80,000 resulting in a federal income tax of $5,632 using the standard deduction. But not all households are the same.
A typical working family would pay an additional $6,120 in payroll taxes, leaving take home pay of $68,248 to cover all of the expenses of raising a family. They have fixed expenses including rent or a mortgage, health care, child care, and probably have very little in savings or other assets.
Compare that with a 70 year old retired couple who collect $80,000 from a combination of $40,000 in Social Security and $40,000 IRA distributions. They would pay $3,232 in federal taxes leaving $76,768 in income. Their expenses are comparatively low. Their home may be paid off and their healthcare is covered by Medicare. And since the median net worth for a 70 year old couple is estimated at $500,000 to $750,000 they have the ability to weather any financial shocks. Clearly taxes are more of a burden for the working couple.
But independent from the ability to pay, do income taxes spread our government’s financial burden fairly? The staggering increase in wealth inequality is proof that they don’t. At the extreme end of the scale it’s estimated that the wealthiest Americans pay a tiny fraction of their realized (as opposed to taxable) income1. And as of the end of 2024 the wealthiest 0.1% of US households had a combined net worth over 5 times that of the entire lower 50%2. Clearly our system isn’t fair.
So how can we fix this? One answer is to tax net worth3 rather than wages. This automatically shifts the tax burden to those citizens who have gained the most while helping those just starting out or less fortunate build their own American dream. No savings? No tax. Net worth of $1B? You’re taxed on that regardless of your ‘income’.
Workers would continue to pay into Social Security and Medicare, but no more income tax or capital gains tax. This means that a young family just starting out will keep more of their wages. And there are other benefits. No tax on IRA distributions or capital gains from the sale of a house or business for instance.
A Model
So what would a net worth tax look like and how would it compare to the current system? Here’s an example which, although is overly simplified and likely flawed, can give a feel for how a net worth based system could work and what the outcome would be for taxpayers.
In FY 2024 the federal government had expenditures of $6.8T and income of $4.9T leaving a deficit of $1.9T. If we eliminate Social Security and Medicare from the mix total expenses were $4.4T. Total net worth for all US households and corporations was $222T, so the tax rate on net worth required to pay the expenses would be 2%.
Although this rate could be applied to all payers equally a series of tax brackets with a progressive rate structure would be more effective in reducing inequality. Here’s one approach:
For entities with a net worth at the 50th percentile or lower a rate of 0.5%
For entities with a net worth in the 50th to 90th percentile, a rate of 1%
For entities with a net worth in the 90th to 99th percentile a rate of 2.5%
For entities in the 99th to 99.9th percentile a rate of 4%
For entities in the top 0.1th percentile a rate of 6.5%
Given this model let’s see how it would compare to the current system.
Examples
Let’s revisit the examples above.
Assuming that the young couple earing $80,000 has a total net worth of $40,000. Instead of $5,632 in federal income tax they would pay a $200 tax on their $40,000 in assets. They would still be responsible for the $6,120 in payroll taxes. But these are dedicated to funding Social Security and Medicare so it is effectively a form of saving.
The retired couple has no payroll tax, so assuming a net worth of $750,000 their only obligation would be a wealth tax of $6500 instead of the $3,232 in income tax. They pay more under this system, but it’s a small fraction of their assets and well under the return of even the most conservative investment portfolio.
Jeff Bezos, with a net worth of $206B would pay a 6.5% wealth tax of $13B. This is a lot, but Jeff Bezos’ also has a lot of money, much of it earned by paying substandard wages to his employees at Amazon4.
Finally, if you compare the ROI on assets with the proposed tax rates, in each of these cases the taxes could be paid with passive income from the investments.
Can It Work?
I think that a tax on net worth is a better way to fund our government than a tax on work. It taxes results rather than effort and would significantly lower the tax burden on the struggling working class. And unlike the trickle down myth of the right it would stimulate the economy. Why? Working people spend their money on consumption and more consumption means more production and more profits for the business community. On the other hand the super rich spend a tiny fraction of their income on consumption. They spend their money on acquiring assets and maximizing their return which drives up the price of assets, the products that they produce, and lowers wages and employee benefits.
Of course the billionaire class will use all their resources to block a net worth tax, and if one were implemented they would find ways to avoid it. But hiding assets may be much more difficult than hiding income. But that’s no reason not to try. And one way to begin this transition is to implement a small net worth tax in addition to the existing income tax and transition away from income taxes over time. I’ll explore that option in a future article.
Questions
Is inequality a threat to our democracy?
What changes to our tax code would you be in favor of?
If MAGA continues to crash and burn while infuriating more and more people, maybe we’ll gain the political will for a wealth tax and rational budget. Send your proposal to Washington, Jim. Makes more sense than what’s going through congress right now.