Balancing the Budget on the Backs of the Rich

One of the lies coming from team Obama is that the “Bush Tax Cuts” played an important role in the deficit and debt situation we are in today and that reversing them is an important step toward a balanced budget.

Now ignoring the fact that the current tax rates have been in effect for 12 years, and that every year since then congress and the president ignored the amount of money collected from taxes and chose to borrow spend more yet somehow this is a revenue and not a spending problem, is it true that the tax cuts “for the rich” were to blame?

The red line on the graph below represents total government outlays in constant 2005 dollars and the green line taxes collected. Clearly we spend more than we collect in taxes and the gap is widening quickly.

The purple line is my calculation of the impact of increasing the actual tax rate paid of the top 25% of wage earners by 3% retroactive to 2001. In 2009, the top 25% paid 87% of all income taxes (source: IRS) so this represents “most” of the taxes collected. I calculated the additional tax for the year 2009 and then added this constant amount to the actual tax collected for each year. There’s obviously an error here, in that the total adjusted gross income for the top 25% changes each year but I think the error is small.

The purple line come nowhere close to balancing the budget. In fact it doesn’t have much effect at all.

The light cyan (blue) line shows that to balance the budget on the backs of the rich we’d need to increase the actual tax rate paid by 20 percentage points – to nearly 60% of income for folks without capital gains. And this assumes that doing so would have no impact on economic productivity or cheating which of course is wrong.

Spending has been growing on average by 6.25% / year since 2001.

GDP and personal income is not growing this fast – hence the split between the red line and the green lines.

The graph below projects what spending will do if it continues to grow at 6.25% year. I’ve included essentially flat tax projections for a visual reference. Now in practice these would be different as they would track GDP.

But there’s no scenario where spending increases by 6.25% / year and the income of the top 25% doesn’t increase by 6.25% / year or more where we don’t go bankrupt. Raising rates – even by a huge amount – doesn’t do it.

I will point out that the top 25% pay 87% of all income taxes but in 2010 income taxes are only 42% of the total tax base (source: www.whitehouse.gov/omb). Another 40% are extremely regressive payroll taxes that nearly everyone who works pays.

When the government  has tapped out the rich, which will happen very quickly, where do you think they will turn to next?

Team Obama paints themselves as the alternative to the ruinous Bush fiscal policy. Nothing could be further from the truth. They are a doubling down on the ruinous Bush fiscal policy.

Mike.

 

 

 

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