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The great debate: more taxes vs. less spending




As Congress debates whether our massive budget deficits should be reined in by raising taxes or by cutting spending, it seems appropriate to republish the above chart. What it shows is that the top 10% of income earners paid 70% of all income taxes in 2008 (most recent data available). Moreover, it shows that the share of total taxes paid by the "rich" has increased substantially since the early 1980s, despite a huge reduction in the top marginal tax rate. If that is not a vindication of the Laffer Curve, I don't know what is. What the chart doesn't show is that the top 5% of income earners paid more in income tax than the other 95%, and roughly half of all workers pay no income tax. In short, the federal income tax burden is being shouldered by a small minority of taxpayers. This minority is now being subject to a "tyranny of the majority," in which the majority of those in Congress are trying to decide whether the minority of workers should effectively pay all the bills for everyone. In that context it's gratifying to note that according to a CNN poll, "two-thirds of voters favor the idea of tying a raise in the debt ceiling to spending caps and a balanced budget amendment." Congress may be out of touch with the people on this one.


As Milton Friedman taught us, the burden of government is not measured by taxes, but by spending. Whether a deficit is financed by raising taxes or by borrowing more, in the end, resources are taken from the private sector and spent by the public sector. That transfer imposes a burden on the economy since the public sector almost always spends money less efficiently than the private sector. So not only is the debate about who should pay for the huge increase in spending over the past several years, but also whether government spending should continue at such high levels. 


UPDATE: For the sake of perspective, I am republishing the following charts which show the different ways in which the federal government taxes and spends (currently at an annual rate of almost $3.6 trillion) our money:




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