Things That Won’t Work: Taxing the Rich

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%
$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%
Source: Internal Revenue Service, 2009 data
The top 5% are people that make more than $154,643.00 (in 2009).

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?

  • Broc Middleton

    Bob, I AGREE WITH YOU, not just about the math being a bit wonky…lol… but also the whole “Bush Tax Cut” debate.  President Obama is NOT pushing the right issue here (see my Facebook wall via July 9th), talking about the Top 1% or Top 2%, 10% whatever… that is all for election politics and getting reelected.  The better move for President Obama and the national debate would be pushing real TAX REFORM (i.e. Simpson-Bowles).  If President Obama would push a real tax reform platform it would force Mitt Romney to put out a plan for real Tax Reform as well.  Then, as a result, the Presidential campaign would be a choice between two Tax Reform plans…instead we are left with a crappy choice between Obama’s plan to increase taxes on the rich and spend more money or Romney’s plan to cut taxes for rich and gut social assistance programs (don’t bother to disagree with that brief synopsis, its completely accurate although basic). 

    If President Obama had a platform of TAX REFORM he could still seek the goal of the wealthy “paying their fair share”….he could create another tax bracket for those making over $500K/year or $1M/year or something… My point being his political message could be the same but the solution he would be putting forward would be much better for America and the national debate. 

    • Robert Ewoldt

      I’m not sure how creating another, higher tax bracket ($500,000 or $1M, as you say) is really reforming the tax system. That sounds more like just making the one we have more complicated in order to take more money away from people.

      Secondly, how do you figure that the rich already don’t pay their “fair share”? There are stats from the IRS that say that they already pay a larger percent of taxes than they have in income.

      • Broc Middleton

        Let me explain…Hypothetically if President Obama was to adopt the Simpson-Bowles Commission on TAX REFORM instead debating the “Bush Tax Cuts” he would be pushing a better narrative for America and our national debate.  The Simpson-Bowles Commission, as is, would create 3 tax brackets to replace our current 6.  So even if President Obama wanted to add another tax bracket to the Simpson-Bowles Commission at lets say 32% for people making $500K/year higher, that would still only make 4 tax brackets 2 less than we have now.  Plus with Simpson-Bowles you are eliminating almost all the deductions, which simplifies the tax system. 
        As for the wealthy not paying their fair share, I put that in quotes to signify that is what Obama is saying, not my opinion…that is the narrative he is pushing right now. My point is that if he pushed real tax reform, instead of the “Bush Tax Cuts” debate, he wouldn’t have to change his campaign strategy for reelection…his solutions would just be better than he is proposing right now. 
        Seriously Bob why aren’t you embracing Simpson-Bowles?  It is a great framework for REAL fiscal change in America.
        –          Simplifying the individual tax code by lowering rates and getting rid of exemptions
        –          Lowering the Corporate tax rate and eliminating exemptions making the private sector more fair and more competitive globally
        –          Lowers government spending in many areas without gutting any one in particular
        –          Social Security age is increased and the payroll cap is raised
        There is a lot more to it but why havn’t you supported Simpson-Bowles at least as a starting point for a “grand bargain”?

        • Robert Ewoldt

          So, are you saying that Obama is wrong when he says that the rich aren’t paying their “fair share”?  What, in your opinion, is a rich person’s “fair share”?

          • Broc Middleton

            So instead of answer my question about Simpson-Bowles, you ask a different question…sigh…
            First of all, I don’t think we (America) are having the right debate.  The questions should NOT be centered around the “Bush Tax Cuts” and whether to extend some part of them or all of them…that’s not the right discussion to be having.  The right debate is TAX REFORM (ie Simpson-Bowles). 
            HOWEVER if you want me to give an opinion on the WRONG debate, that being whether to keep the “Bush Tax Cuts” for the rich, you need to ask the right question.  The right question is not who is paying their “fair share” and who isn’t…Because for many the question of “fair share” is not about percentages it’s about perspective.  The right question is…WHO CAN AFFORD IT? Can lower income Americans afford it, can middle income Americans afford it, or can high income Americans afford it?  In the reality of 2012 federal revenues are still very low about 15% of GDP…America’s budget demands that we increase its federal revenues, so if you only going to look at BAD SOLUTIONS like debating the “Bush Tax Cuts” the right question is, WHO CAN AFFORD IT? And the answer is… Yes the rich can afford it. 
            BUT as I said, this is only if you are wanting to talk about BAD SOLUTIONS to fix the problem.  The right way to handle this problem would be TAX REFROM (ie Simpson-Bowles). 
            You ready to answer my question now?  Why aren’t you a supporter of Simpson-Bowles? 

          • Robert Ewoldt

            The House rejected Simpson-Bowles by 382-38 ( Why would I support something that is so universally disliked?

          • Broc Middleton

            Your link say “Whoops can’t find that page” Error 404.  

            Now,  to answer your question directly perhaps you should make up your mind about it not allow a vote in the House decide what YOU think of it.  However to make a different argument, if BOTH sides don’t like Republicans and Democrats…I would argue there is probably something good to it in the way of effective compromise.  To be frank,  the impression that I am getting is that you actually don’t know too much about Simpson-Bowles but since I am a supporter of it, you question its legitimacy…I could be wrong, its just a feeling I have.  

          • Robert Ewoldt

            Yes, I always decide what I think by what you think :)

          • Robert Ewoldt

            Your “If both sides hate it, then it must be a good compromise” is a horrible argument.

            I would say, “If both sides hate it, but vote for it anyways, that’s a good compromise.”

            Here’s the link again:

          • Broc Middleton

            My point in both side hating something goes with the idea that in compromise BOTH side will feel like they have given something up….

            You didn’t address my two other points though.

            1. You should make up your OWN mind about Simpson-Bowles

            2. How familiar are you with what Simpson-Bowles actually proposes?  If you are against it…explain why. 

          • Broc Middleton

            The link is an interview between (R) Sen. Tom Coburn (TC) and Ezra Klein (EK). I assume you know of Tom Coburn. 
            EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?

            TC: I don’t know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didn’t vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If you’re here just to get reelected, you’re worthless to the country.

      • Broc Middleton

        ……….(tap foot)……..

  • helga thomas

    The bottom line on collecting more taxes:
    Get everyone out of the unemployment line and employed and as a result – pay taxes! How? Let’s ALL buy products Made in America wich gets  Americans back to work and start selling our poducts overseas! Europeans LOVE products made in the US and the current Dollar/EURO exchange rate lets us take full advantage of that!