Wharton School’s Elephant-in-the-Room Report
How Could Economists Overlook the Single Biggest Cause of the National Debt?
1,019 words
By David Demers
The most bewildering aspect of the Wharton School’s new special report — “Lowering Debt & Growing the Economy” — isn’t what it says, but what it ignores.
Not one word about the massive federal tax cuts doled out to the wealthy since 1980, which is the primary reason the national debt has become so large ($36 trillion). To refresh your memory, here’s just a few of the tax cuts that have benefited the wealthiest top 10 percent from 1980 to the present:
• a 47 percent decrease in the top earned-income tax bracket (from 70% to 37%);
• a 43 percent cut in the maximum estate tax (from 70% to 40%), plus an 8,559 percent increase in the nontaxable threshold from $161,563 to $14 million, which means only 14 of every 10,000 taxpayers (0.14%) actually pay an estate tax;
• a 43 percent decrease in the maximum capital gains tax rate (from 35% to 20%); and
• a 30 percent decline in the corporate tax rate (from 30% to 21%), which boosts wealthy taxpayers’ portfolios through higher stock prices and stock buybacks.
The Wharton report assumes, as do many conservative analyses, that government spending is the main cause of the growing national debt.
That’s just not true.
Government spending has only increased at a 2.6 percent inflation-adjusted annualized rate since 1980. Most of the $36 trillion national debt stems not from spending but from the tax cuts mentioned above and from the mounting annual interest owed on the debt (now at $900 trillion).
In 2024, for example, the government spent $6.8 trillion but only took in $4.9 trillion in revenue. Most of the $1.9 trillion shortfall stems from the failure to collect enough taxes from the wealthy, because federal tax rates for the working and middle classes have stayed roughly the same through the years.
To reduce the national debt, the Wharton report offers 12 recommendations, some of which increase taxes while others reduce them over the next thirty years (to the year 2054). Taken as a whole, these changes have little effect of the amount of taxes that the wealthy and most other income groups pay. The only group that appears to benefit are the poorest quintile. Through a tax credit, some of them will see their annual income increase about $3,700 to $5,000.
The report also recommends that capital gains taxes be raised from 20 percent to 28 percent and the top-tax bracket rate for earned income be reduced to 28 percent from 37 percent (the 2025 rate). So all earned and passive income is taxed at 28 percent.
But ordinary Americans will pay a big price for these changes.
To balance the budget, the eligibility age for Social Security will have to be raised to 70 and for Medicare to 67. Medicare benefits also would flatten after 2037. These changes will adversely impact the quality of life for everyone now under the age of 50.
But that’s not all.
If the wealthy do not pay more taxes, wealth gaps will continue to grow at staggering rates. The current inflation-adjusted annualized rate of growth for the top 10th percentile right now is about 6 percent (14% for the mega-rich), compared to only 0.4 percent for the bottom 50th percentile and 1.3 percent for the 50th to 90th percentile (the middle class). The only way to eliminate these gaps is to tax the wealthy more and the bottom 90th percentile less.
So how could one of the most prestigious business schools in the country issue a report that ignores the tax-cut elephant in the room?
Because economists identify with the power structure (economic and political elites), not with the powerless (working and middle classes). I call this identification theory, and it’s rooted in classical sociological theories about the effects of shared values and norms.
College students who major in economics are socialized into a perspective that views the world from the top-down, not bottom up. This includes a tacit acceptance of the political and economic institutions that regulate the economy.
Economics courses also include a heavy dose of libertarianism, which contends that a free marketplace — one in which the government plays a very minimal role — produces the most prosperous economy. More often than not, taxes are seen as a drag on the economy, not as a corrective to imperfections in a libertarian economy (e.g., such as economies of scale and barriers to entry that curb competition in many industries).
After graduation, most economists take jobs in governmental, corporate and academic institutions that generally serve the interests of political and economic elites. In these environments, to suggest that the wealthy should pay more in taxes is like bad-mouthing the emperor in a coliseum where lions are in the waiting.
University economists have a bit more freedom to criticize the status quo, thanks to academic freedom. However, obtaining grant money to research economic inequality isn’t easy, because most government and private foundations are controlled by political and economic elites who have no interest in funding research that conflicts with their self-interest.
Self-interest also influences economists’ views of taxes.
Their median income is about $150,000, which means they pay about $20,000 in federal taxes each year (after various deductions). Paying that much irritates many of them, because many poor and lower working-class Americans pay little to no federal income tax. The wealthy and the private libertarian foundations they fund also have this mind-set, even though concentrated wealth continues to grow at a rapacious pace.
If the Wharton School’s recommendations are implemented, it’s possible the national budget may be balanced and the debt paid down. But there are no guarantees. The School’s 30-year model is complex and rests on a number of assumptions. And this model will do nothing to reduce economic inequality, which poses a threat to democratic processes and raises the risk of political violence against the wealthy class.
A much simpler and far more effective way to reduce the debt and the wealth and income gaps is to gradually increase taxes on the wealthy and cut taxes on the working and middle classes. But is this plan too simple for economists and politicians?
How Could Economists Overlook the Single Biggest Cause of the National Debt?
1,019 words
By David Demers
The most bewildering aspect of the Wharton School’s new special report — “Lowering Debt & Growing the Economy” — isn’t what it says, but what it ignores.
Not one word about the massive federal tax cuts doled out to the wealthy since 1980, which is the primary reason the national debt has become so large ($36 trillion). To refresh your memory, here’s just a few of the tax cuts that have benefited the wealthiest top 10 percent from 1980 to the present:
• a 47 percent decrease in the top earned-income tax bracket (from 70% to 37%);
• a 43 percent cut in the maximum estate tax (from 70% to 40%), plus an 8,559 percent increase in the nontaxable threshold from $161,563 to $14 million, which means only 14 of every 10,000 taxpayers (0.14%) actually pay an estate tax;
• a 43 percent decrease in the maximum capital gains tax rate (from 35% to 20%); and
• a 30 percent decline in the corporate tax rate (from 30% to 21%), which boosts wealthy taxpayers’ portfolios through higher stock prices and stock buybacks.
The Wharton report assumes, as do many conservative analyses, that government spending is the main cause of the growing national debt.
That’s just not true.
Government spending has only increased at a 2.6 percent inflation-adjusted annualized rate since 1980. Most of the $36 trillion national debt stems not from spending but from the tax cuts mentioned above and from the mounting annual interest owed on the debt (now at $900 trillion).
In 2024, for example, the government spent $6.8 trillion but only took in $4.9 trillion in revenue. Most of the $1.9 trillion shortfall stems from the failure to collect enough taxes from the wealthy, because federal tax rates for the working and middle classes have stayed roughly the same through the years.
To reduce the national debt, the Wharton report offers 12 recommendations, some of which increase taxes while others reduce them over the next thirty years (to the year 2054). Taken as a whole, these changes have little effect of the amount of taxes that the wealthy and most other income groups pay. The only group that appears to benefit are the poorest quintile. Through a tax credit, some of them will see their annual income increase about $3,700 to $5,000.
The report also recommends that capital gains taxes be raised from 20 percent to 28 percent and the top-tax bracket rate for earned income be reduced to 28 percent from 37 percent (the 2025 rate). So all earned and passive income is taxed at 28 percent.
But ordinary Americans will pay a big price for these changes.
To balance the budget, the eligibility age for Social Security will have to be raised to 70 and for Medicare to 67. Medicare benefits also would flatten after 2037. These changes will adversely impact the quality of life for everyone now under the age of 50.
But that’s not all.
If the wealthy do not pay more taxes, wealth gaps will continue to grow at staggering rates. The current inflation-adjusted annualized rate of growth for the top 10th percentile right now is about 6 percent (14% for the mega-rich), compared to only 0.4 percent for the bottom 50th percentile and 1.3 percent for the 50th to 90th percentile (the middle class). The only way to eliminate these gaps is to tax the wealthy more and the bottom 90th percentile less.
So how could one of the most prestigious business schools in the country issue a report that ignores the tax-cut elephant in the room?
Because economists identify with the power structure (economic and political elites), not with the powerless (working and middle classes). I call this identification theory, and it’s rooted in classical sociological theories about the effects of shared values and norms.
College students who major in economics are socialized into a perspective that views the world from the top-down, not bottom up. This includes a tacit acceptance of the political and economic institutions that regulate the economy.
Economics courses also include a heavy dose of libertarianism, which contends that a free marketplace — one in which the government plays a very minimal role — produces the most prosperous economy. More often than not, taxes are seen as a drag on the economy, not as a corrective to imperfections in a libertarian economy (e.g., such as economies of scale and barriers to entry that curb competition in many industries).
After graduation, most economists take jobs in governmental, corporate and academic institutions that generally serve the interests of political and economic elites. In these environments, to suggest that the wealthy should pay more in taxes is like bad-mouthing the emperor in a coliseum where lions are in the waiting.
University economists have a bit more freedom to criticize the status quo, thanks to academic freedom. However, obtaining grant money to research economic inequality isn’t easy, because most government and private foundations are controlled by political and economic elites who have no interest in funding research that conflicts with their self-interest.
Self-interest also influences economists’ views of taxes.
Their median income is about $150,000, which means they pay about $20,000 in federal taxes each year (after various deductions). Paying that much irritates many of them, because many poor and lower working-class Americans pay little to no federal income tax. The wealthy and the private libertarian foundations they fund also have this mind-set, even though concentrated wealth continues to grow at a rapacious pace.
If the Wharton School’s recommendations are implemented, it’s possible the national budget may be balanced and the debt paid down. But there are no guarantees. The School’s 30-year model is complex and rests on a number of assumptions. And this model will do nothing to reduce economic inequality, which poses a threat to democratic processes and raises the risk of political violence against the wealthy class.
A much simpler and far more effective way to reduce the debt and the wealth and income gaps is to gradually increase taxes on the wealthy and cut taxes on the working and middle classes. But is this plan too simple for economists and politicians?