Stan Geiger

Reaganomics and the Debt Game

Does the rich man pay taxes? Well, sure he does. Everybody pays taxes. Taxation is so broad today it's impossible to not pay taxes, no matter what you do. A homeless guy on the street that bums a buck and spends it in a Quik Trip store pays a tax. He pays it with someone else's money, but he pays a tax.

But when it comes to the rich man and his relationship with the federal government, it is quite possible for him to pay virtually nothing in taxes. Allow me to explain.

The federal government levies a per-gallon fuel tax. But that's no thing to the rich man. There is, of course, the payroll tax. But while the payroll tax is a major burden on average people, the rich man pays little or nothing in payroll taxes. So the only real problem for the rich man is that nasty ol' federal income tax.

The IRS says the richest 1 percent paid $368 billion in income taxes in 2005, which was nearly 40 percent of all the income tax money collected for that year. Okay, so that's a measure of what came in the front door. But what went out the back door? In other words, what was the net?

Let's look at a rich guy. Oh, let's say a college football coach. After his high-priced tax lawyers have done all they can for him, he reports an adjusted gross income of $1 million for the year. The IRS says the average tax rate applied to such a fellow is 23 percent. Using that figure, the gent in my example would pay $230,000 in federal income tax for the year.

That goes in the front door.

Now, let's say our guy has been a heavy buyer of U.S. Treasury debt over the past 20 years, and has accumulated 10 million dollar's worth that pays, on average, a 3 percent coupon rate. So he's collecting $300,000 a year in interest, paid out of the federal coffers.

That goes out the back door.

In the example I laid out, the rich fellow has a net federal income tax burden of nada. In fact, he comes out 70 grand to the good side in the exchange.

What makes such a scenario possible? Reaganomics.

Taxes are slashed for the rich, which leads to deficit spending and forces the Treasury to issue debt. Meanwhile, the reduced tax burden on the rich provides them with money they can use to buy up the debt instruments so they can be on the receiving end of the interest.

Beautiful in its simplicity, don't you think?

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