Obama’s 2% lie
President Obama has laid out the most ambitious and expensive domestic
agenda since LBJ, and now all he has to do is figure out how to pay for
it. On Tuesday, he left the impression that we need merely end "tax
breaks for the wealthiest 2% of Americans," and he promised that
households earning less than $250,000 won't see their taxes increased
by "one single dime."
This is going to be some trick. Even the most basic inspection of the
IRS income tax statistics shows that raising taxes on the salaries,
dividends and capital gains of those making more than $250,000 can't
possibly raise enough revenue to fund Mr. Obama's new spending
ambitions.
Consider the IRS data for 2006, the most recent year that such tax
data are available and a good year for the economy and "the wealthiest
2%." Roughly 3.8 million filers had adjusted gross incomes above
$200,000 in 2006. (That's about 7% of all returns; the data aren't
broken down at the $250,000 point.) These people paid about $522
billion in income taxes, or roughly 62% of all federal individual
income receipts. The richest 1% -- about 1.65 million filers making
above $388,806 -- paid some $408 billion, or 39.9% of all income tax
revenues, while earning about 22% of all reported U.S. income.
Note that federal income taxes are already "progressive" with a 35%
top marginal rate, and that Mr. Obama is (so far) proposing to raise it
only to 39.6%, plus another two percentage points in hidden deduction
phase-outs. He'd also raise capital gains and dividend rates, but those
both yield far less revenue than the income tax. These combined
increases won't come close to raising the hundreds of billions of
dollars in revenue that Mr. Obama is going to need.
But let's not stop at a 42% top rate; as a thought experiment, let's go
all the way. A tax policy that confiscated 100% of the taxable income
of everyone in America earning over $500,000 in 2006 would only have
given Congress an extra $1.3 trillion in revenue. That's less than half
the 2006 federal budget of $2.7 trillion and looks tiny compared to the
more than $4 trillion Congress will spend in fiscal 2010. Even taking
every taxable "dime" of everyone earning more than $75,000 in 2006
would have barely yielded enough to cover that $4 trillion.
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