Free Markets, Free People


Tax the Rich and What Do You Get?

Another day older and deeper in debt. Of course, that’s because you plan to spend $3.6 Trillion on budget over the next year.

WASHINGTON – President Obama laid out his first budget plan, a bold $3.6 trillion proposal that would transfer wealth from rich taxpayers to the middle class and the poor, and predicts a stunning federal deficit of $1.75 trillion this year – nearly four times last year’s record.

Obama blamed the expected federal deficit explosion on a “deep and destructive” recession and recent efforts to battle it, including the Wall Street bailout and the $787 billion stimulus plan.

[...]

Among the budget proposals, the plan would:

extend a $400 tax credit for most workers while letting expire former President George W. Bush’s tax cuts for couples making more than $250,000 a year. The budget contains almost $1 trillion in tax hikes over 10 years on individuals making more than $200,000 and couples earning more than $250,000;

close tax loopholes for the wealthy to raise $318 billion toward a down payment on Obama’s universal health care plan;

clamp down on the Pentagon budget, which would get a 4 percent boost next year, but would then get increases of 2 percent or less over the next several years;

make permanent the expanded $2,500 tax credit for college expenses;

spend more than $6 billion on cancer research at the National Institutes of Health next year, a 15 percent hike;

spend $3.9 billion to improve the nation’s sewage treatment plants and drinking water systems; and

raise $15 billion a year, beginning in 2012, from auctioning off carbon pollution permits to help develop clean-energy and renewable-energy technologies. The administration “will work expeditiously” to get Congress to approve an 83 percent reduction in global warming emissions by mid-century. There’s also more money at NASA for space-based monitoring of greenhouse gases.

sisyphus
After reviewing some of the comments from those intended to be taxed, as well as some of the criticisms of those taxpayers’ intelligence [as an aside, I think the liberals denouncing both the story and the interviewees are playing a little fast and loose with the assumptions, since the taxpayers displayed no misunderstanding of marginal rates, and voiced concerns solely based on principles], I got to thinking about how much money will this proposed tax hike really raise. This seems important, not only because of the size of proposed budget, but also since a common refrain from those in favor of letting the top rate snap back to 39.6% (from the current 35%) is that it will only cost those taxpayers 5 cents on the marginal dollar, which is very little to worry about much less enough to change behavior, or so the argument goes.

Before looking at the actual numbers, let’s get something straight first. While it is accurate to say that raising the top rate only costs these taxpayers a nickel per extra dollar earned, that is not all that is being proposed. These taxpayers will also be losing deductions and credits that they would otherwise have, as well as paying extra taxes on anything subject to cap-and-trade taxes, should that lovely piece of legislation be passed. Moreover, if you truly believe Obama when he says that those with incomes less than $250,000 per year will receive a tax cut, then it seems ludicrous to pretend that at least some, if not virtually all, of those taxpayers near the margin will change their working behavior so as to be in the benefit group rather than the extra-taxed one.

Nevertheless, for purposes of calculating the expected tax revenues generated under this plan, I’m going to assume that nobody changes their behavior in the slightest (i.e. everyone earns as much taxable income as possible), and that the number of taxpayers and the amount of taxes paid largely mirrors the 2006 numbers (which is the most recent data available).

According to IRS figures [xls], about 50% of all taxable income came from the $200,000 and above earners in 2006. By my calculations that came to $2.056 Trillion dollars in taxable income from 3,847,241 taxpayers (about 9% of all returns). This cohort paid approximately $522 Billion in taxes, or about 62.4% of the total $837 Billion in tax receipts. These are the people upon whom the new burden will be placed according to President Obama.

In order to figure out how much taxable income is above $200K (there is no breakout for $250K and above), I took all of the taxpayers in the $200K to infinity range (3,847,241) and multiplied it by 200,000 (= 769,448,200,000).

I then subtracted that number from the (rounded) total of taxable income for the same range (@ $2.056 Trillion), and got $1,286,551,800,000. If I thought about it correctly, then that should be the amount of taxable income above $200K.

I then took my above-$200K number and multiplied it by 5 cents, figuring that the increase in marginal rate of 4.6% would lead to about a nickel per taxable dollar earned in new revenues, if everything were to remain static.

From all of that I figured that approximately $64.3 Billion in new taxes would be raised by the new tax hike … to cover a $3.6 Trillion budget.

I sent my calculations to Dale, who became so engrossed in the matter that he put together an entire spreadsheet figuring the numbers in not one, not two, not three, but in six different ways. I realized later that asking Dale to check out my math was rather like standing on one foot and excitedly calling attention to my “skill” while in the midst of an acrobat convention.

Anyhoo …

After Dale played with the numbers [xls] for awhile, he arrived generally at the conclusion that the absolute most that could be raised was in the neighborhood of $85 Billion, and at worst around $55 Billion. On average, Dale calculated that approximately $65 Billion was the likely amount of new tax revenue that could be expected if all payers in the 2006 cohort behave exactly as they did then. Sticking with the metaphor, “Yes, Michael, that’s a decent one-legged stand you have there.”

In short, a complete klutz has a better chance of joining the Flying Wallendas than the bottom 95% of taxpayers do of getting a tax cut. Instead, they will all see a significant tax hike, whether in their marginal rates, in excise taxes, corporate taxes, fuel taxes, or other forms of indirect taxation. And as those taxes begin to mount up, and the national debt does it’s best imitation of the Challenger, people will work and produce less and less, and tax revenues will dry up.

That is the plan for our recovery. Read it and weep.

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9 Responses to Tax the Rich and What Do You Get?

  • Or, there will be more taxation on the ‘rich’ than is currently being discussed.  Or some combination of the two.  If the FICA tax cap is raised, that will be a very large sum of money. Of course that will go straight into the lock box. 

  • The big problem with taxing the rich is the same problem with Socialism .. eventually you run out of other people’s money.  Besides while Obama fiddles while the Stock Market tumbles, the rich just arent going to be as big a “cash cow” as often thought.  Eventually, Obama will return to the middle class to “spread the pain”, especially if he is stupid enough to take on Social Security.

  • Interesting analysis.  Now, did the idiots employed by TAO do this sort of exercize to determine whether or not the tax increases on those nasty ol’ rich people would actually bring in the revenue needed?  Or are they merely doing what feels good (to a liberal), i.e. lying and punishing people for having made a few bucks?

    If TAO and his idiots DID do the math and reached similar conclusions, then one has to ask just what the hell he thinks he’s playing at.  He’s PURPOSELY increasing the national debt by huge sums???  If so, why?  Or is it that he’s never actually been responsible for anything in his life and can’t grasp the concept of a balanced budget?  Do the words mean nothing to him beyond a campaign slogan?  Is he really that stupid?

    • He’s PURPOSELY increasing the national debt by huge sums?

      How else will he cut the deficit in half unless he artificially inflates it.

    • “In their 1966 article, Cloward and Piven charged that the ruling classes used welfare to weaken the poor; that by providing a social safety net, the rich doused the fires of rebellion”

      Isn’t it the obama administration that is providing and expanding this fire dousing social safty net?

      i’m not entirely certain that Obama has the political capitol to be able to bankrupt the country and still be able to retain his position (or his life) long enough to complete the migration to total socialism.

      Just look at our good buddy to the south hugo. It won’t be long before he has an all out revolt on his hands unless he finds some solution to his food problem or oil goes way up soon.

    • Interesting article, suek.  Thanks for that.

  • Even assuming taxpayers are idiots who don’t understand marginal tax rates, it is their perception that matters., because it leads to actions, like reducing their work-load.

  • Rather than direct or indirect taxation, there are two other less direct ways to raise funds. These ways result in costs to all that are equivalent or worse than taxation, but that won’t stop government. Its the way they are funding the “stimulus”.

    borrow or print (or tax) it doesn’t make that much difference.

    Its the spending that is the burden.