Taxes to Balance the Budget? Not Unless Rates Go Up 150 Percent, Study Says

A table by Public Notice shows how much more taxpayers would have to pay of their income in order to match current spending. (Public Notice)

It's Tax Day, and the Washington chatter is all about whether America's top earners should be taxed more.

But, as the dim outlook from a key ratings agency showed Monday, Uncle Sam's deficit problem is deep. And if the federal government really wanted to use the tax code to close the deficit, it turns out everybody would feel the burn.

A new Tax Day study showed that if Washington wanted to balance the budget using tax increases alone, rates would have to more than double across the board -- including on the middle class -- to keep up with federal spending.

As Republicans often argue, the top tier already pays a greater percentage in taxes than all the rest. The government could extract hundreds of billions more by upping their rates, but without significant spending cuts would have to turn next to the middle brackets.

"Everyone would be looking at a tax hike if that's the answer here," Public Notice director Gretchen Hamel said.

IRS data showed that in 2008, the top 5 percent of earners -- households earning more than $160,000 -- accounted for about 59 percent of all federal income tax paid. The next 45 percent -- solidly middle-class taxpayers earning between $33,000 and $160,000 -- accounted for about 39 percent of all personal income tax paid.

The bottom 50 percent accounted for the remaining sliver of tax revenue. In fact, a Tax Policy Center study showed that 45 percent of households in the United States will pay no federal income tax for 2010.

White House spokesman Jay Carney said Monday that those households do pay taxes.

"There are many taxes besides income taxes," he said. "Those who are paying payroll taxes, are working Americans, they very much have a stake in the system and they very much have a stake in the economic future of this country."

President Obama has said emphatically that he will not allow the tax rate on families earning more than $250,000 to remain at 35 percent after 2012, a source of contention among Republicans who say the top earners are already carrying the brunt of the "shared sacrifice."

Meanwhile, critics warn that tax hikes will, in all likelihood, have a limited impact on the deficit -- unless they are raised beyond recognition.

The estimate from the nonpartisan Public Notice demonstrated this point. It showed that if Washington wanted to hoist tax rates to actually cover spending, the top tier rate would go from 35 to 88 percent; the middle tier from 25 to 63 percent and the lowest from 10 to 25 percent.

"You'd have to more than double taxes and you still wouldn't solve this problem," Hamel said. "And the problem is spending."

Obama is targeting his proposed increase on the top 2 percent of wage earners, casting it as a hike on millionaires and billionaires. He argues they can afford to pay a little more to help the country balance its books.

But as one might expect, virtually nobody thinks they’re taxed too little -- though the burden varies drastically across the income scale.

A new Gallup poll released Monday showed that while 57 percent of Americans describe their income tax as "fair," most think their taxes are still too high. The more an individual made, the stronger they felt on that question, the poll showed.

The Obama administration emphasizes that its deficit reduction plan leans more on spending cuts than tax increases. The administration is looking at $1 in revenue increases for every $3 in spending cuts. That's about the ratio being eyed by the "gang of six" senators working on a bipartisan compromise.

But Sen. Mark Warner, D-Va., a member of that group, said in an interview Sunday that the revenue increases don't have to come from tax rate hikes. Rather, he stressed that lawmakers could instead cut back on deductions and other loopholes that are costing the U.S. Treasury.