Last week, President Obama again suggested that his opponents in Congress are holding up economic progress because they won’t raise taxes on “the rich.” So, I decided to a do a little bit of math.
In speech after speech last week, like one in Cedar Rapids, Iowa, President Obama said,
“This has nothing to do with me wanting to punish success; we love folks getting rich… but I do want to make sure that everybody else gets that chance as well… I believe that we should make sure that taxes on the 98% of Americans don’t go up, and then we should let the tax cuts expire for folks like me, the top 2% of Americans. Anybody making over $250,000 a year, including me, would go back to the tax rate that we were paying under Bill Clinton, which, by the way, was a time when our economy created nearly 23 million jobs, the biggest budget surplus in history, and created plenty of millionaires to boot.”
So, I decided to go through the IRS data and do the math. Warning: this is a bit wonky, so turn off your music and buckle down…
First, I started with income and tax data from the IRS for 2009:
Tax Group | Total AGI ($ millions) | Income Taxes Paid ($ millions) | Group’s Share of Total AGI | Group’s Share of Income Taxes | Income Threshold | Marginal Tax Rate | Average Actual Tax Rate |
Top 1% | $1,324,572 | $318,043 | 16.9% | 36.7% | $343,927.00 | 35% | 24.01% |
Top 5% |
$2,482,490
|
$507,907 | 31.7% | 58.7% | $154,643.00 | 33% | 20.46% |
Top 10% | $3,379,731 | $610,156 | 43.2% | 70.5% | $112,124.00 | 28% | 18.05% |
Top 25% | $5,149,871 | $755,903 | 65.8% | 87.3% | $66,193.00 | 25% | 14.68% |
Top 50% | $6,770,174 | $846,352 | 86.5% | 97.7% | >$32,396 | 15% | 12.5% |
Bottom 50% | $1,055,215 | $19,511 | 13.5% | 2.3% | <$32,396 | 15% | 1.85% |
The top 1% are pepole that make more than $343,927.00 (in 2009).
The top 5% paid $507B in taxes in 2009 (or 58.7% of all income taxes). These people currently pay a 33% marginal rate, and an average 20.46% tax rate.
If we raise the marginal tax rate on the highest bracket to 39.6% (the rate under Bill Clinton, as referenced by the president), and the ratio remains the same between actual and marginal tax rates, the average top earner will actually pay 23.15% in taxes.
That means that, in 2009 dollars, we would bring in an additional $66.8 billion in revenue to the federal government coffers. If we adjust that for inflation, we bring that up to $70.9 billion in 2012 dollars.
However, this exercise assumes two things: first, that we’re really raising taxes on the entire top 5%–anyone making above $154,643, which has not yet been suggested by any Democrat, Republican, or by the President; second, it also assumes that the people whose taxes are raised don’t adjust their behavior to lower their taxes due the government. This goes contrary to economic theory, both on the right and on the left. If you tax something, you get less of it. If you lower taxes on something, you get more of it.
So, letting the “Bush tax cuts” expire for the people that make over $250,000 will bring in less than $71 billion in federal revenues. Will that close our budget deficit? In 2012, President Obama proposed a budget that included $3.729 trillion in spending, with a deficit of $1.327 trillion. Given that deficit, $71 billion in additional money amounts to 5.3% of the deficit. Every little bit helps, but really? Do we really want to adopt a tax policy that arguably curbs economic growth by taxing small business owners, just so we can shave 5% from our deficit? Our economy is already only growing at an anemic 2% annual rate; do we want to begin to tax ourselves into another recession?
In order to close the deficit by “taxing the rich,” we would have to raise the income tax rate so that the rich would close the gap, right? In order to take $1.327 trillion from the top 5%, we would need to have their actual tax rate be 53.5%, which means having a top marginal tax rate of 91.52% for everyone making over $154,643 (and this is before any state or local taxes are taken out).
Let’s say that we tell the quite-a-bit-less-than-rich that they have to share the sacrifice of our budget deficit, too, and raise the tax rates on everyone in the top 25% (anyone making above roughly $71,000). To take $1.327 trillion from the top 25%, we would need to have their actual tax rate be 25.77%, which means having a marginal tax rate of 43.89% for everyone that makes more than $71,000. Does anyone want to do that? To put that in perspective, if I’m making $71,000 in Illinois, I would pay:
- $18,296.70 in federal taxes (25.77% actual tax rate)
- $3,550.00 in state taxes (5% actual tax rate)
- $4,402.00 in Social Security taxes ($8,804 if I’m self-employed)
- $1,029.50 in Medicare taxes ($2,059.00 if I’m self-employed)
- Local taxes may vary, but between $3,000.00 and ~$10,000.00
- Total taxes: between $30,278.20 and $42,709.70
- Which leaves between $40,721.80 and $28,290.30 to live on
In other words, we could have a tax system that takes almost all a person’s money over $150,000 per year, and we still would barely close the budget deficit that we currently have. Or we could have a tax system that takes over half of a person’s income if they make over $71,000 per year.
But Democrats tell us that this is all for the common good, right? We all need to share the sacrifice, right?? Let’s go ahead and raise taxes so we can close the budget deficit so the government can help those that are poor and needy!
Discussion Question: Does anyone still think that we can tax ourselves out of our deficit and debt problems?