Summary: The Relationship Betweeen Taxes, Income, Debt, Spending, Social Benefits, and the Trade Deficit

This is summary of linear regression model results (posted over the past several weeks) on the relationship between taxes, income, debt, spending, social benefits, and the trade deficit. The following results are dependent on changing the fifth quintile’s effective tax rate from 13 to 17.5%, its income from 46,800 to 50,800 dollars, and its consumer spending rate from 36 to 40%. This models the result if the highest income bracket tax rate is increased from 35% to 39.5%.

• Federal government Tax Revenue will vary from 1.09 trillion to 1.26 trillion dollars. The model accuracy is perfect (R² = 1).
• Consumer Spending will vary from 12.2 trillion to 12.9 trillion dollars. The model accuracy is perfect (R² = 1).
• The federal government Effective Tax Rate will vary from 8.3% to 11.2%. The model accuracy is perfect (R² = 1).
• Federal government expenditures on Social Benefit spending will vary from 1.74 trillion to 2.13 trillion dollars. The model accuracy is near perfect (R² = 0.97).
• The national Debt will vary from 9.6 trillion to 11.5 trillion dollars. The model accuracy is perfect (R² = 1).
• The national Trade Deficit will vary from a loss of 441 billion to 813 billion dollars annually. The model accuracy is perfect (R² = 1). The trend results are similar if the trade deficit is adjusted for oil imports.

Similar results are achieved from another model that varies the effective tax rate from 8% to 11%, the first quintiles adjusted social benefits income from 17,800 dollars to 21,800 dollars, and the fifth quintiles adjusted social benefits income from 46,800 dollars to 50,800 dollars.

• Federal government expenditures on Social Benefit spending will vary from 1.8 trillion to 2.03 trillion dollars. The model accuracy is near perfect (R² = .97).
• The national Debt will vary from 9.15 trillion to 10.95 trillion dollars. The model accuracy is near perfect (R² = .99).
• The national Trade Deficit will vary from a loss of 725 billion to 881 billion dollars. The model accuracy is near perfect (R² = .98). The trend results are similar if the trade deficit is adjusted for oil imports.

Since consumer spending, income, and the tax rate are directly related – it makes sense to use all three when computing the tax rate. An example of a fair tax rate formula is: Tax Rate (TR) = Income (I) / (1 / (1 – Consumer Spending (CS))). After all, if the tax rate goes up and consumer spending goes down, it will adversely affect the economy.

Summary: If the federal government raises the income tax on the highest earners (fifth quintile) from 35% to 39.6%: tax revenues will go up nearly 170 billion dollars annually; consumer spending will go down 700 billion dollars; the effective federal income tax rate will go up from 8.3 to 11.2%; the federal government spending on social benefits will increase by 300 billion dollars; and the national debt will sore 1.9 trillion dollars. These results track if a separate model is created taking into account adjusted national incomes due to social benefits (entitlement spending). The bottom line – increasing taxes on the highest earners will only create higher social benefit spending, a much greater national debt, and much lower consumer spending that could cost the economy up to 2 million jobs. In other words, raising taxes is the main ingredient in a formula to create a recession. On the hand, there is an argument that increased taxes could both increase or decrease the trade deficit.

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