The President's Budget Address and the Reality of Taxing the 'Rich'

The President is going to address the nation yet again.  He apparently intends to unveil another revised plan to fool the American people into believing he is sincere about reducing the deficit and reining in spending after the unserious budget he presented in February was soundly rejected by the country.  While his hand has been forced by the twin factors of the Republicans in the House (buoyed the effectiveness of the Tea Party movement) and the upcoming Presidential election, he will nonetheless bring up increasing taxes on the so-called wealthy and corporations as one of the primary means of solving the debt and deficit problem.

Unfortunately this approach plays well among the less enlightened and Obama's left-wing base who are in the thrall of class warfare and the capability of that argument to enflame passions and potential violence.  This argument is solely being utilized to keep the Democrats and their allies in power.  The reality is raising taxes and demonizing the wealthy will not solve but will instead exacerbate the current economic woes the country is experiencing.

There are stubborn things called facts that refuse to go away.  Normally the left and the media dismiss any argument coming from those on the conservative side of the spectrum as being unreliable and subject to right-wing bias.  One of the favored agencies of the liberals is the IRS (except when they are being audited), so let us focus entirely on the statistics they have published.

The wealth of Americans is an obsession with the left.  The last time the IRS published any statistics on that matter was in 2004, when the economy was doing far better than it is today.  At that time there were 2.7 million adults in the United States with a net worth (total value of all assets less debts and liabilities) in excess of $1.5 million for a total of $10.2 Trillion.  The IRS reference can be found here; Data Table: All top wealth holders by size of net worth.

If the government were to decide that no one should have a net worth above $1.5 million and would confiscate all wealth above that level, then there would be a one-time windfall of $6.1 Trillion to the Treasury.  As the total national debt is nearly $14.5 Trillion, this action would result in the reduction of the debt to $8.4 Trillion.

However this tactic presents a major problem; how is the government going to realize the value of the seized assets?  For example within the net worth of the now confiscated assets are upwards of $2+ Trillion in real estate, but who is going to buy that at market value as no one will have the leverage or cash to do so?  Or, who will buy the stocks, both publicly traded and closely held, where there are nearly $3 Trillion in present value, without collapsing the markets entirely?  The same is true of state and local bond issues or corporate bonds, U.S. Treasury Bonds, mutual funds etc. etc.  The government, if it could at all, might realize a quarter of the value of the seized assets (if China were really interested) which had been previously used to underwrite the national economy.

The long term devastation to the economy would be unfathomable, as who would create jobs and wealth if they knew their assets would be seized above a certain point? 

If the left were to be convinced that this tactic would be counterproductive, then their argument turns to having the wealthy pay more income taxes every year as a major means of reducing the annual deficit and minimizing the amount of spending cuts necessary to balance the budget.

As a starting point lets us stipulate that the projected budget deficit for the current fiscal year is $1,665.0 Billion.  Per the Obama Budget it will be $1,100.0 Billion next year.  The IRS data for the following exercise is found as follows:  Section: Tax Generated; subsection, Tax and size of Adjusted Gross Income (2008): Table 3.5

The tax year of 2008 was the last to date that the IRS has done this kind of analysis.  In 2008 the highest marginal tax rate of 35% was applied to all AGI above $357,700.00.  In that year the total amount of AGI subject to the highest rate was $662.8 Billion.  The government collected in taxes $218.0 Billion (35%).

Assuming no change in behavior and a general eagerness to pay more, and if Obama and the left convince the Congress to raise taxes on the so-called rich, then the potential increase in revenue would be as follows.  If the highest rate of 35% were raised by a factor of 29% to 42%, the additional revenue would be $43.5 Billion, not much of a dent in the $1,665 Billion deficit.  If the rate was raised by a factor of 50% to 52.5%, the additional revenue would be $108.9 Billion.  Still nowhere near enough, so let's just tax it at a rate of 100% thus bringing in an additional $404.8 Billion.  Unfortunately, the country is still $1,260.0 Billion in the hole for the year.

The top 1% of all income earners now pay nearly 40% of all income taxes collected by the government.  There is a point at which the so-called rich would cease to have any incentive to earn above the highest tax threshold, particularly as the above exercise does not take into account state and local income taxes, Medicare, as well as a myriad of other "revenue enhancers."

From 1958 to 2008 the total tax revenue to the Federal Government has averaged between 16% and 20% of GDP.  (The highest level in history was in 1944 when it hit 20.9 %.)  This despite the fact that the top marginal rate has varied between 90 and 35% over that period.  The historical lesson: there is simply no way the government will change the way the people, particularly the wealthy, pay their taxes short of outright confiscation and permanent damage to the economy.

The left will argue that the wealthy should pay more even if it only makes a slight impact on the deficit.  Why, other than out of spite?  The only way to increase revenues to the Treasury, as has been proven by history, is to grow the economy, and to do that, the government cannot destroy the incentive of the producer class to do so.  That requires dramatically reducing spending, regulations and the size of government at all levels.

When Obama and the Democrats, in league with the unions and the radical left, continue their mantra of the need to tax the rich and berating the so-called wealthy, it is not because their diatribes offer a viable solution to the country's fiscal woes or that they genuinely care about the citizenry, but because it serves their purpose to divide the people against each other and maintain their power base, as does their refusal to cut spending in order to buy votes.