With the trillions in spending by the new Administration for the federal budget, and bailouts, our new President has two problems to solve:
- 1. He needs to keep and expand his support base, some quarters of which are uneasy with the magnitude of the spending.
- 2. He needs to raise a lot of money in taxes to pay for his initiatives.
The way this administration will address these problems will create winners and losers in new tax policy.
President Obama has already stated that income tax increases would not affect those making less than $250,000. This is called ‘economic justice' which requires the government, as the arbiter of fairness, to determine how the national wealth should be allocated. Income tax return data shows that removing the Bush tax cuts is not enough to pay for the higher level of government spending as called for in the Administration's budget. The future for tax revenue based on raising taxes on the wealthiest Americans can be seen in the results of California's tax structure -the most progressive income tax scheme in the country.
- 1. 2004 was good year economically, and many high income Californians generated much of their income from exercising stock options and stock sales.
- 2. 14,000 is a small number compared to the 35M people living in the state. If half of these wealthiest Californians moved out of state, California would face additional and significant tax shortfall.
As a voting block, the wealthiest 1% is not significant. Many of the wealthiest 1% of Americans are not opposed to bigger government because their wealth was inherited (e.g. Ted Kennedy), or they can afford to pay the taxes -- or at least afford to pay for tax avoidance with no detriment to their standard of living. In 2006, 41% of Americans paid no income taxes according to the Tax Foundation. These include low income tax filers, many of whom benefit from the Earned Income Tax Credit which provides a "refundable tax credit" (a check from the Treasury, not a write-off) for dependents of low income wage earners. 41% of Americans is a significant segment of the American voting public. According to the AFL-CIO website, 26% of American voters are union members and the AFL-CIO was strongly supporting Barack Obama for president. Unions that will especially benefit from Obama's spending plans include 1.4 million members of AFSCME, American Federation of State, County and Municipal Employees, over 1 million members of the United Auto Workers, and the 1.4 million members of the American Federation of Teachers. These beneficiaries will vote for increasing government since they benefit directly. By creating more beneficiaries of big government, Obama can create a sustainable majority voting block who will vote to raise other people's taxes.
During 2006, Tax Foundation economists estimate that roughly 43.4 million tax returns, representing 91 million individuals, will face a zero or negative tax liability. That's out of a total of 136 million federal tax returns that will be filed. Adding to this figure the 15 million households and individuals who file no tax return at all, roughly 121 million Americans-or 41 percent of the U.S. population-will be completely outside the federal income tax system in 2006.
- Source: Tax Foundation
If you think that the forthcoming changes in tax law will only affect wealthiest, you are mistaken. To generate significant increases in tax revenue, the middle class must be hit -- and hard.
When beneficiaries of government policy do not sufficiently overlap the payers of those benefits, we have a governing system of representation without taxation. This type of system is not sustainable long term, but history suggests it may persist for some time under the pretext of ‘economic justice' unless soundly rejected by the American people.