Question

Refer back to Problem $14-11$. If the politician defines "the rich" as people with annual taxable incomes exceeding $\backslash (1$ million per year, what is another difficulty with the politician's reasoning, given that "the rich" rarely earn a combined taxable income exceeding $\backslash )1$ trillion, yet the federal deficit has regularly exceeded $\$1$ trillion in recent years?

Short answer

Only eight percent of the estimated budget shortfall is expected to be covered by revenues of around 50 dollar billion.

Step-by-step solution

Introduction

In recent years, the federal budget has been continually in deficit, making it difficult for the government to carry out its budget initiatives based on annual budget predictions.

Federal government needs 

Policymakers have argued that the budget deficit can be spread out fully by increasing the total amount of tax collected at the end of the year.

According to the federal government, the federal budget deficit is estimated to be around $\$563$billion USD.

The federal government needs to collect roughly $4000$dollars in additional taxes from each and every worker in the United States in order to cover the budget deficit.

Furthermore, the budget projection figures that are being specified in order to eliminate the budget deficit are mostly unnecessary, as this technique will not eliminate the deficit.

Another recommendation for policymakers is to increase the tax rate on the wealthiest persons in the economy.

Explanation

However, in the present case, this approach will not function because the rich are typically characterized as millionaires with taxable income of more than one million per year. On the other hand, the number of persons who fit under this category is quite small, at around three lakh.

Even raising the tax rates will have no effect because the reduction in the deficit amount will be insignificant. Similarly, changing the amounts of marginal tax rates will not help to bring the deficit down to the required level.

The IRS's findings have regularly revealed that additional revenues generated by raising tax rates are insignificant, with revenues of roughly fifty billion dollars accounting for only eight percent of the expected budget shortfall.