Obama's Tax Increases On 'The Rich' Actually Means You

Obama campaigned using a distinctly conservative plank on his otherwise liberal platform: tax cuts for 95% of Americans.  He's smart enough to know that's what people want.  He's also liberal enough that he'll never do it.  We discussed that repeatedly during the campaign, but I think it's worth reviewing now that he's working to actually implement his tax increases on 'the rich'.  If you need some background, here are a few links you might want to check out first.

Who Pays Taxes (And How Much)?
Obama's Tax 'Cut' Explained
Obama's Four Tax Increases For People Earning Under $250,000
Small Business Not Safe From Obama Tax
Obama's Tax Plan and Small Business

So, the links above have firmly established the fact that Obama's taxes will hammer just about everyone at some point, regardless of their income.  The top earners, however, will bear the biggest brunt of Obama's proposed tax increases, which common sense then indicates will have a ripple down effect that is going to be amplified for those in the lower income brackets.

Aside from that common sense analysis, however, Obama's argument doesn't even hold up to the flimsiest scrutiny on its own.  Now that Obama is moving forward with his plans to increase taxes on 'the rich', there are ample figures to prove that the middle class are not only going to lose out on his promise of a tax 'cut', but will also share the burden of his tax increases on 'the rich'.  This general idea has been debunked before on this blog, but the Wall Street Journal has a new article that does a terrific job of laying it out in real numbers.  Read the whole thing:

President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."

This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.

Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.

But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.

Mr. Obama is of course counting on an economic recovery. And he's also assuming along with the new liberal economic consensus that taxes don't matter to growth or job creation. The truth, though, is that they do. Small- and medium-sized businesses are the nation's primary employers, and lower individual tax rates have induced thousands of them to shift from filing under the corporate tax system to the individual system, often as limited liability companies or Subchapter S corporations. The Tax Foundation calculates that merely restoring the higher, Clinton-era tax rates on the top two brackets would hit 45% to 55% of small-business income, depending on how inclusively "small business" is defined. These owners will find a way to declare less taxable income.

The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can't possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.

On that point, by the way, it's unclear why Mr. Obama thinks his climate-change scheme won't hit all Americans with higher taxes. Selling the right to emit greenhouse gases amounts to a steep new tax on most types of energy and, therefore, on all Americans who use energy. There's a reason that Charlie Rangel's Ways and Means panel, which writes tax law, is holding hearings this week on cap-and-trade regulation.

Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle class.

So, as you can see, even if 'the rich' get hammered, the money raised will be far short of what Obama needs to cover his government expansions.  So where will he turn to come up with the rest?  If he sucks the wealth out of 'the rich', and the poor already escape taxation altogether, that leaves...[drum roll please]...the middle class.

You're next.  You have been warned - spread the word far and wide.

Now let's get practical.  I'm not sure what can be done to stop this, so the next best thing is to properly frame his actions to prepare for a comeback in 2010.  I think a lot of people voted for Obama (or at least didn't oppose him) because they heard only the soundbites of him pledging to cut taxes rather than looking at his actual policies.  But, once their checks start shriveling up, they'll suddenly take notice and get pissed about it.

We need to be prepared for that day, and that effort starts now.  Tell people that Obama's tax increases on 'the rich' are just a facade, and that his tax increases will really reach deep down into the middle class.  People won't believe you, or they may ignore you, but that's okay.  You're setting up the knockout punch that will be delivered by their own W2.

If the facts have been properly gathered, widely distributed, and effectively communicated, 2010 may be a GOP landslide.

There's my two cents.