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Thursday, March 8, 2012

Tax The Rich: Obama Class Warfare/Campaign Ploy or Legit Deficit Reduction Option?

Tax the rich! Tax the rich! Fair share... and all that.

We've heard it; you've heard it... over and over and over again. Obama and many on the left have used this slogan repeatedly. We ask why? Why is this so popular? Is it truly a move that once executed could reign in the deficit? Could we close the spending vs. deficit gap? Sure, our government spends $3.81 trillion per year, which works out to about $122,000 per second, but perhaps we wouldn't be in such dire straits financially ($1.3 trillion yearly deficit) if we just taxed the rich more, right? Or is this the mantra of class warfare? Is it a hollow, do-nothing tactic that will ultimately pit the non-rich versus the rich without actually doing anything positive for our federal budget? Who knows?

We wanted to find out, and we did. Below is our analysis. We are using IRS tax data from 2009. We used the same info for our post on January 30th, 2012: http://loudmouthelephant.blogspot.com/2012/01/stopping-lefts-propaganda-with-truth.html

For the IRS data spreadsheet, click here: http://www.irs.gov/pub/irs-soi/09in11si.xls

We broke down our analysis into two segments: tax filers with total incomes > $1,000,000 and tax filers with total incomes > $200,000. First, the million-dollar earners:

Take a look at Figure 1. These are the givens, the real information extracted from the IRS data:


What do we take from this? First, the facts: 

- In 2009, there were 236,883 filers with incomes of one million dollars or more. These earners comprise 0.17% of the total (140,494,127) filers. 
- Millionaires paid an average final effective tax rate (this is AFTER deductions, write-offs, loopholes, etc.) of 28.5%. Earners with incomes below $1,000,000 paid an average final effective tax rate of 16.2%. For an understanding of how a final effective tax rate is calculated using the current marginal tax rate system, click here
- Millionaires paid $177 billion in taxes. Though they made up only 0.17% of the tax base, they paid 20.5% of ALL the income taxes paid. 

Conclusions? Check them out in Figure 2 (click the image for an enlarged version): 


What do these calculations mean? First, the method:

We took the number of tax returns and the total income tax paid and increased each by the proposal on the left. For example, if we increased the tax rate paid by millionaires by 10% (the top proposal) they would pay $17,749,967,200 more in taxes. This would increase their overall final effective tax rate to 31.3%. Unfortunately, it would only decrease the deficit (remember, using $1.3 trillion) by 1.4%

As far as conclusions go, increasing taxes on million-dollar earners would do very little for our current financial situation. Looking at the data, if we raised millionaires' tax rates to a total final effective tax rate of 42.7% (a 50% increase), we would only shrink the deficit by 6.8%, and we would still have a $1.211 trillion deficit. If we increased their taxes by 200%, they would be paying 85.4% of their income in taxes and would only decrease the deficit by 27.3% Finally, as you can see with the bottom line, we would have to increase millionaires' tax rates by 366% to halve the deficit (as Obama promised to do in 4 years). Unfortunately, millionaires would be paying 132.7% of what they made in taxes. Fair share? Ha! Regardless of what we do to tax rates paid by millionaires, it wouldn't do much. It is clear that in order to close the deficit, the U.S. government would have to drastically cut spending. 

Now, onto tax filers earning > $200,000. As with Figure 1, Figure 3 below shows the givens taken from the IRS data: 


First, the facts:

- In 2009, there were 3,924,490 filers with incomes of $200,000 or more. These earners comprise 2.79% of the total (140,494,127) filers.
- These earners paid an average final effective tax rate (this is AFTER deductions, write-offs, loopholes, etc.) of 26.8%. Earners with incomes below $200,000 paid an average final effective tax rate of 13.3%.
- Filers earning more than $200,000 annually paid $434 billion in taxes. Though they made up only 2.79% of the tax base, they paid 50.2% of ALL income taxes paid.

The conclusions (click the image for an enlarged version):


As with the millionaires, though less severe with regards to the amount of tax rate increases needed, increasing the tax rates of earnings pulling in > $200,000 still does not do much for our financial situation. If the tax rates for this group were increased by 30%, the federal government would only pull in approximately $130 billion more in tax revenue. This would reduce the deficit by only 10% to $1.169 trillion. If the government increased their tax rates by 149.6%, it would reduce the deficit by half. Unfortunately, these earners would pay nearly 67% of their income in taxes, and the negative effects on the economy as a whole would be drastic. 

So what does this all mean? In my opinion, the "tax the rich" mantra is nothing but a class warfare slogan. The rich pay a disproportionate amount of the income tax in this country already, and for a country that prides itself on "equality," how can we think of making the tax situation more imbalanced? The government wants to spend, spend, spend, which is the REAL problem, but we cannot simply turn to our rich countrymen and say "pay up!" The spending must be reduced. It's plain and simple. As far as the financial effects of taxing the rich would have on closing the deficit gap and improving our country's financial situation, as they say on the hit show Mythbusters, this notion is "DEBUNKED."

Please share your opinions below.

18 comments:

  1. Obama is toast - 2012

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  2. Good morning :)

    And, oh boy, this is the big one! The fun topic.

    First, I don't see this topic as an issue of ‘tax the rich, solve the deficit crisis.’ And I'm pretty sure nothing close to that implication has ever been made by Obama or any prominent figures in politics/media. In fact, even Obama’s “4 trillion plan” included far bigger spending cuts than tax increases (4 to 1 if I recall?).

    The point is more, that we will need to raise taxes as part of our ultimate deficit solution, and this ‘millionaire tax’ in their view (and I mostly agree) is the only way we can do it right now without hurting the far more volatile situation of the middle class.

    It's like, picture you're the coach of a small roster sports team in a play-off game with two equally good and valuable players on the bench, but player 1 is hurt and at risk of worsening the injury but player 2 perfectly fine. If you lose another player on the field and have to use one of your two subs, the best move to make is to ask player 2 to step up for the good of the team (regardless of if they want to), rather than risk hurting player 1 further and losing him completely for the championship (which hurts the entire team).

    I don’t see this situation as much different; except of course people on a sports team typically want to play in the game and will usually be willing make choices better for the team as a whole… and in this situation the people of our country don’t necessarily ‘want to pay more taxes’, and that sense of nationalism in ‘for America’ doesn’t quite exist in that sense in current day.

    Additionally, even though the effects on the deficit are minimal and we still need major spending cuts to make the biggest dent (which Dems and Repubs universally agree upon), that doesn't serve as a very convincing reason not to do it. Just like how recommending spending cuts in ideas such as 'eliminating food stamps for millionaires’ is an incredibly small cut (we're talking less than 0.0001% of our deficit), that doesn't mean it shouldn't be done. The “why bother when the result is small” attitude is precisely how we and people as a whole tend to get into major debt to begin with.

    Also, by your own data millionaires already pay an average tax rate of 28.4%. The only thing the proposed millionaire tax does is put the minimum tax rate at 30%, which isn’t really excessive or taxing them into oblivion. Though I understand you see any additional tax paid by one class and not another as unfair, but we just disagree on that. :)

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    1. RKen - Good morning, sir!

      I would say I have to respectfully disagree with you. Obama absolutely has said that he wanted to raise taxes on the wealthy in order to close the deficit: http://articles.latimes.com/2011/sep/17/nation/la-na-obama-millionaires-tax-20110918

      "President Obama will propose that people earning more than $1 million a year pay at least the same tax rate as middle-class earners to help reduce the soaring budget deficit, according to administration officials."

      Another example (one of many): http://www.nytimes.com/2011/09/19/us/politics/obama-plan-to-cut-deficit-will-trim-spending.html

      There are many other of these but yes, he did say that this would employed as a means to close the deficit. Because this is being touted as a solution, and because it is being given so much press (in addition to the lie of... and yes, data shows it's a lie to even try to claim that this is the norm when it isn't even close, that "millionaires pay lower tax rates than their secretaries") is the reason I wrote this. I have been studying this stuff for about a week. I am really tired of the over-blown, false broadcasting things of "the rich don't pay enough in taxes" and "if we tax the rich we can help close the deficit" and "millionaires pay lower tax rates than the middle class." In all honesty, it's garbage. Unfortunately, the president is spouting it, and the press is broadcasting it. What's worse? The sheeple are eating it.

      Additionally, the 4 to 1 cut plan has been a myth, too. Obama's budget projects at least a $600 B to $1 deficit through 2022. If we cut by a 4 to 1 ratio, we should have a lot quicker deficit reduction.

      Regardless of how much or how little a tax increase would help, I can't stand the constant broadcasting that this is the way to go... that this would make a significant improvement. Obama seems to chant this like this is the best, end-all solution. It's not. Of course, I don't agree with just pointing the government tax gun at one class. But from Obama's State of the Union address to his speech in Kansas, making a big deal out of this is just plain misleading. Even if we incorporated the "Buffett Rule," if you look at the top line of the tax proposal, it will fall below the net effective final tax rate of 31.3%, which would bring in $17 B more in revenue. If we did make millionaires pay a flat 30% tax rate, the "Buffett Rule" would only bring in a total of $9,407,482,616, which would shrink the deficit by only 0.7%. With the government spending $122,000 per second, the "Buffett Rule" would bring in only 21.42 hours worth of government spending. That would cover us from midnight on Jan 1 until about 9:45 that day.

      To me, the conclusion is: it does nothing. Even if you do account for the minuscule deficit reduction it accomplishes, the way Obama and the left are broadcasting it is very, very misleading. To me, it wreaks of class warfare.

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    2. I said that Obama (or anyone prominent) has never said "taxing the rich would solve the deficit crisis", not that no one has said "it would help." Of course it would help. If I paid an extra $1 a year in taxes, it would help. That statement is incredibly ambiguous lol.

      I’m also pretty sure the official estimates for the millionaire tax were around $300b/year of additional revenue. But I’ll have to find the source for that later.

      Obama's budget plan wasn't a myth either; it was never passed. You misunderstand by what was meant in the '4 to 1 ratio', that was meant as in that for every $4 in spending cuts there was $1 in tax increases (it was either 4 to 1 or 3 to 1, don’t recall off head). That’s not myth, it is a numerical fact. Which further supports the point that Obama/Democrats recognize we need both spending cuts and tax increases.

      And I don't feel Obama chants this any louder than any Republican figureheads chant cutting the budget by eliminating/reducing stuff like food stamps, PBS, planned parenthood, etc. But the fact of the matter is that, all of those programs combined don’t even amount to 1% of our deficit either.

      In fact, if the $300b/y figure is right, all of those cuts combine are still less than 1/100th of the worth of the millionaire tax. So I really don’t see “tax the rich as part of our deficit solution!” and more or less ridiculous than “cut welfare, food stamps, PBS, PP, etc as part of our deficit solution!”, nor do I see it as any different as far as ‘class warfare’ goes. You can’t call asking more of the rich class warfare, while not calling asking more of the poor the same thing. Especially when one effects less than 100k people, and the other effects 40+ million.

      And again I have to disagree with the idea that “if it only makes a small difference, it isn’t worth doing.” That will leave us getting no-where fast.

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    3. RKen - I don't believe this statement either: “if it only makes a small difference, it isn’t worth doing.” What I am against is the president and any media outlet continuously touting that this is a major solution. It's not. He devoted a LOT of time in his state of the union address, a lot of time in his Kansas speech and a LOT of time in numerous other speeches for something that simply doesn't deserve that much time. Sure, take up 15-20 mins in a SOTU speech if this reduced the deficit by 25%... 10%, heck, 5%. But to continuously blast this, when it would shrink the deficit by 0.7% is not proportional. That's my biggest beef.

      If you did hear that the Buffett rule would raise $300 B ( I actually haven't heard that myself, I wish I did... it would be a nice "gotcha" catch ) it is a complete lie. There are only 236K million-dollar earners in the U.S. They earned about $623.5 B. If you taxed their entire $623.5 B income at 30%, the gov't would pull in $187.05 B total. That's only about $10 B more than they currently pay. I'm not going over these numbers as a way to insult in any way; I'm just pointing out that if that was the case being made, it's completely false. To me, still the biggest point... at $122K per second, we need to cut spending... a LOT.... and... cough... stop acting like taxing millionaires is a viable solution :-)

      Definitely good points being made, though.

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    4. Yeah, LME, sadly (as slim also just pointed out) no debt reduction plan actually seems to take a serious shot at our overall debt. They all still involve running massive deficits for the next 10+ years.

      The $300b figure might've been another one of those '... over 10-years...' statistics.

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    5. Yup, slim is right on this. It is sad, but no politician has the gall to stand up and say, "hey, I'm cutting this and that and this and that." We can't cut medicare; we'd lose the senior vote... We can't cut welfare and WIC, we'd lose that vote... we can't cut defense, we'd be weaker and lose the votes of those that are intertwined with defense. Someone needs to do it... but that person also knows they'd be voted out as soon as the chance came up.

      As far as the $300 Bil thing, I still can't get around the IRS data. If we raised millionaires' taxes to 30%, we'd raise only about $10 Bil per year extra. If whoever made that argument wants to admit it would be $300 Bil over 30 years, I'm all okay with that :-)

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    6. Actually RKen, I believe the Connie Mack Penny Plan balances in the sixth year (or so the claim is). His plan is to reduce government spending by 1% a year for 6 years and cap spending at 17% or 18% (maybe 19% sorry I forget which it is) of GDP. His reductions were actual 1% cuts in spending not cutting the growth rate of spending and calling it a spending cut.

      I think one drawback to his plan though is it doesn't necessarily say a 1% reduction in everything (Dept, Program, etc) just the total, which is where all the political posturing and lying will begin. If you just say 1% from the military, 1% from Social Security, 1% from Medicare, 1% from food stamps, 1% from EVERYTHING.....NO EXCEPTIONS. (None of we'll grow my pet program by 5% and cut yours 7% and it washes) we won't have to hear about granny over a cliff or gutting the military or any of that politicking BS speech.

      I have not read the entire plan (as it is pretty common sense it will NEVER pass I am figuring, so why bother reading it all) so I don't know exactly how the revenue is supposed to increase enough to match the lowered spending.

      I don't know why they can't ALL be reasonable enough to figure out we SPEND way too much damn money. Somewhere, somehow, someday we have to cut the actual spending. I don't see how anyone in their right mind can't agree that we have to actually cut spending on EVERYTHING. We can't just save a little here and grow this program over here a little. If we were still talking about $160 Billion deficits sure, you could pick and choose a little. My goodness we are a trillion and a half short every year, the question shouldn't be what do we cut, it should be how much do we cut everything. Oh yeah, and how soon can we start cutting.

      Just my opinion, of course.

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  3. Seems like common sense,that if you take more of a percentage of peoples money rich or poor.They in turn have less money.Which leads to more dependance on Govt programs.Which leads to higher deficits.Which leads to the govt taking more money.Which leads to people having less money.Which leads to more dependance on govt programs.Which leads to higher deficits.Which leads to the govt taking more money.Get it? See a pattern here?

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  4. Huneybunches1982March 8, 2012 at 7:12 AM

    I don't agree that we should tax the rich more. Entitlements are killing this country, and they should be cut cut cut. Why should we pay for the elderly's health care, retirement and all that. Can't these people save while they're alive. Because they don't, future generations are having the shit taxed out of them to cover people that didn't take responsibility for their lives while they had the chance? Please. It's slowly creeping up on us, and it's time to start paying the piper. Taxing more is not the solution. Taking money out of the economy is not the solution. When we have taxed the millionaires all we can (and this data shows what happens if we do and it don't work) what will we do next? We need to stop spending so damn much.

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  5. Good morning LME.

    As far as deficit reduction and taxation goes there aren't enough rich people. According to Forbes 400, America has 400 billionaires with a combined net worth of $1.3 trillion. Congress could confiscate their stocks and bonds, and force them to sell their businesses, yachts, airplanes, mansions and jewelry. That would just get us back to the Bush era deficit levels for this year. Who do we fleece next year and the next?

    Sadly, when politicians (Republicans and Democrats both) talk about spending cuts they aren't really spending cuts. They are merely cuts in the growth rate. Instead of the Dept of Whatever budget growing 6% next year it only grows 2%, they call that a spending cut. It is still 2% more than the previous year, so in my book that is NOT a cut at all.

    I also love when I see people post things (on CNN, Huffington Post, and MSLSD mostly) like "If we just cut our military in half we'd be back to a surplus" or similar variations of that. I laugh my butt off when I read that. We could completely eliminate (hypothetically of course) our National Defense spending and we would still have an $800 or $900 BILLION deficit.

    We have some serious budget issues. Our deficit for 2007 was $160.7 Billion which is almost what our MONTHLY deficit is running now. Singling out 1% or 2% of the population and taxing them more does nothing but appease the jealous, envious, and simple minded.

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    1. Hey slim,

      I agree in that most of the spending cuts proposed by both Dems and Repubs hardly amount to anything at all. No matter what plan you look at, they all still involve running deficits for the next 10+ years. Which is pretty unbelievable.

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    2. I also agree, and I also think it's pretty unbelievable. Everyone wants to talk of cuts, but no one wants to pull away any social programs, military spending, etc. The power of the vote grab is too strong. It's pretty sad, and in my opinion, immoral to keep passing this debt on. If I personally could not pay my bills, since I can't just give myself more money, I would curb my spending. To me, this is what the government should do.

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  6. Less than 1.4% deficit reduction, but turning the majority of the country against the minority. Yeah, it's plain and simple. Class warfare.

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  8. Let me just say that "Fare Share" was tried b4 in this Country. They don't teach that in Schools or True American History anyway! But it was tried and it failed. That is why the New People had to go to the First Peoples for help to survive! Without even looking at the Numbers it's easy to surmise if you look around you. I am no expert but I raised 2 kids, worked and made ends meet! I never got anything for Free and I saw the Better Offs suffer too. Even though it wasn't close to our Suffering it was still there. If we delve into something so deep we lose the Life Experience that we have gained. Our Elders would know and they understood that even if you took everything from the haves it wouldn't help in the end. It would just add more to the number of Poors. Because if you take more then you spend more and that more is never enough. Sooner or later they will run out of Rich and come after the Rest of us and the Poor will get Poorier and more suffering will come. I am sad that my People the Native American is still under the thumb of Gov. It has been along time since we where the First Forced Welfare/FS peoples of this land. We survived b4 they came and we should be able to do that again. But Entitlements are a learned thing just as Racism is. If we do not Stand for what we believe in and what is right then we will fall. No matter if the Rich Pay more or Not!

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