Saturday, November 01, 2008

The Worst of All Tax Policies

For decades, voters have had to balance proposed increases in government spending against the necessary increases in taxes they would require. Government growth has been tempered by voters asking "yeah, that sounds nice, but how much will it cost me, the taxpayer?"

There are some who are suggesting Obama's plan to only raise taxes on the top 5% of earners is nothing but a typical empty campaign promise. But let's suppose Obama is telling the truth. That if elected he and the Congress will change the tax laws so that:

No family making less than $250,000 will see their taxes increase [and] the typical middle class family will receive well over $1,000 in tax relief under the Obama plan.

Such a change would turn the temperance of voters asking themselves "how much will government program X cost me, the taxpayer?" completely on it's head because only 1.5% percent of households (which I'll equate with Obama's use of "family") make more then $250,000.

Apparently, no longer would 98.5% of the population need to worry about increased taxes for the increased spending Obama is pushing for.

This shifting the tax burden for new spending to the top 1.5% reeks of "tyranny of the majority" and ominously brings to mind the Alexis de Tocqueville quote: "The American democratic experiment will succeed until the people realize they can vote themselves money from the public treasury. Then it will collapse."

And all this does call into question exactly how Obama will pay for the $430 billion a year of spending increases he proposes.

In 2006, 43% of the government's $2.4 trillion tax revenues came from individual income taxes. (With 15% from corporate income taxes and the remaining 42% from "other taxes").

Let's assume these percentages remain under a hypothetical Obama administration. That would mean Obama needs to raise individual income taxes by $185 billion - all of which would only be paid by the top 1.5% of income earners.

Now I'll be charitable in my analysis here. In addition to the $250,000 figure, Obama has also thrown around the figure of the "top 5%." So, let's actually be more generous and say this $185 billion will all be paid by the top 5% of income earners, not just the top 1.5%.

For 2006, the top 5% paid more than 60% of all personal income taxes - in dollars (rather than a percent), that's somewhere a bit higher than $625 billion. Adding this $185 billion would pump up the total personal income tax revenues by about 15%, from $1.04 trillion to $1.23 trillion. Adding this $185 billion strictly to the burden of the top 5% of income earners would mean that instead of paying 60% of income taxes, they would pay approximately 66%. That means the top 5% (which would include households making $150,000 and up) would be responsible for two-thirds of personal income tax revenue.

That's right:
5% paying two-thirds.

By contrast, let's look at the bottom 40% of households. Allow me to simply quote a recent Weekly Standard article:

The lowest 40 percent of income earners as a group actually receive net payments from the federal income tax system. (They get 3.8 percent of total federal income tax revenues instead of paying any income taxes.) The middle 20 percent of income earners pay 4.4 percent of federal income taxes. Thus the bottom 60 percent of income earners together, on net, pay less than 1 percent of all federal income taxes. (These workers earn 26 percent of national income.)

The data show that the top 1 percent of income earners now pay 40 percent of all federal income taxes, which is almost double their share of the national income. The top 10 percent pay 71 percent of federal income taxes, though they earn just 39 percent of the nation's pretax income.

At what point do even liberals realize this would be grossly unfair?

When you add in the fact that Obama is going to these lower income families a refundable tax credit (meaning that if the tax credit makes you have a negative tax liability, the government gives you the money for the credit, not just reduces your tax burden to zero), what we are really looking at here is, in fact, redistribution. Or, in Obama's words, sharing the wealth.

As Don Boudreaux clarifies, this isn't pure socialism, but:

This "socialism-lite," however, is as specious as is classic socialism. And its insidious nature makes it even more dangerous. Across Europe, this "mild" form of socialism acts as a parasitic ideology that has slowly drained entrepreneurial energy – and freedoms – from its free-market host.

Could it happen in America? Consider the words of longtime Socialist Party of America presidential candidate Norman Thomas: "The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened." In addition to Medicare, Social Security, and other entitlement programs, the gathering political momentum toward single-payer healthcare – which Obama has proclaimed is his ultimate goal – shows the prescience of Thomas's words.

The fact that each of us depends upon the efforts of millions of others does not mean that some "society" transcending individuals produces our prosperity. Rather, it means that the vast system of voluntary market exchange coordinates remarkably well the efforts of millions of individuals into a productive whole. For Obama to suggest that government interfere in this process more than it already does – to "spread" wealth from Joe to Bill, or vice versa – overlooks not only the voluntary and individual origins of wealth, but the dampening of the incentives for people to contribute energetically to wealth's continued production.

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