Obama Needs to Do His Math Again

Obama has defined "rich" as anyone making over $250,000/year. Last night he vowed that nobody earning less than that would pay a dime in extra taxes as a result of all the things he has proposed. If we take that to include the $800 billion stimulus bill, it's tough to see how the numbers add up.

Based on data complied by the Tax Foundation for 2006, here is what we know: The top 1% of income earners (1.4 million taxpayers) had $1.8 trillion of adjusted gross income and paid $400 billion in federal income taxes. It took an income of at least $389,000 to qualify for that distinguished group. The top 2-5% of income earners (5.4 million taxpayers) had $1.2 trillion of AGI and paid $200 billion in federal income taxes. It took an income of at least $154,000 to qualify.

I'm going to assume that incomes aren't significantly higher today than they were a few years ago, and I'm going to interpolate and guess that the top 2% earn at least $250,000 per year, make about $2 trillion in income, and pay about $450 billion in income taxes.

A senior administration official announced today that "Obama will propose $634 billion in tax increases on upper-income taxpayers and cuts to government health spending to fund health reform over 10 years," and that "The proposed tax change would limit the deductions available to people in the highest income tax brackets."

Over the next three years, if he gets his way, I figure he is going to be spending an extra $600 billion or more on a the combination of "stimulus" and universal healthcare. That's probably a conservative estimate, since the Wall Street Journal's Op-Ed yesterday guessed that universal healthcare alone would cost at least $220 billion a year.

I don't think he can make significant cuts to health spending, and I figure he is lowballing his cost estimates. If he wants to bring the deficit down and not raise taxes on 98% of taxpayers, that means that the IRS is going to need to take at least an additional $200 billion a year out of the pockets of the "rich," if not much more. That means that the "rich" are going to need to cough up about 50% more in taxes per year, and that money will supposedly come as a result of the expiration of the Bush tax cuts and the elimination of most if not all their deductions. I just don't see how anyone can (or should, for that matter) try to pick the pockets of the rich for that much money. Even Robin Hood would never have been so brazen.

The magnitude of Obama's attempt to expand government at the expense of a tiny minority is just simply mind-boggling; so outrageous, in fact, that it is highly unlikely to work. If he succeeds in getting universal healthcare, the middle class will find themselves eventually saddled with huge new tax burdens and medical care that will be rationed by a group of "enlightened" bureaucrats.

The thing people need to remember about universal healthcare is that it cannot possibly be cost-effective. If you offer healthcare to everyone for "free," the laws of economics and human behavior dictate that the demand for healthcare will exceed the supply of it. Sooner or later it will have to be rationed, just as it is in places like Canada and the U.K.

And to think that we could probably solve 80-90% of the healthcare problem by simply changing the tax code so that anyone, not just employers, could deduct the cost of healthcare insurance. This would reintroduce basic market dynamics to the healthcare market, and that is the only thing that can make healthcare cost-effective and widely available.

I've posted this before, but it's good to keep this in mind when listening to Obama casually assume that there is no problem having the rich pay half again as much as they are already paying. This chart shows the cumulative share of taxes paid by top income earners, according to data from 2006 (e.g., the top 1% pay 40% of all income taxes, and the top 10% of earners pay 70% of all income taxes). To be in the top 1% of taxpayers you've got to have adjusted gross income of just under $400,000. Obama defines "rich" as those making at least $250,000, and that would consist of roughly the top 2% of income earners.

As a rule of thumb, the top 2% of taxpayers are probably paying close to 50% of all income taxes, which in 2006 totaled a bit over $1 trillion. Federal revenues for calendar year 2008 were $2.4 trillion, just about exactly the same as they were in 2006, so it's safe to assume that total income taxes haven't changed much since 2006. (Corporate taxes are a little over $300 billion, and payroll taxes are about $650 billion.)

It's hard to keep track of all the new spending Obama is proposing, but between the stimulus bill, universal healthcare and bank bailouts—plus his call for a general increase in the federal budget of 8.5% for the next year—it could easily add up to an extra $300 billion a year for many years to come. Do the math: the "rich" are currently paying about $500 billion per year in income taxes, and he presumably wants them to pay an additional $300 billion—a 60% increase in their tax burden. That is just about impossible in my book. Something has got to give.

Comments

[Steven Hansen:]

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago, another is from Tennessee, and the third is from Minnesota.

All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. “Well,” he says, “I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me.”

The Tennessee contractor also does some measuring and figuring, then says, “I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me.”

The Chicago contractor doesn’t measure or figure, but leans over to the White House official and whispers, “$2,700.”

The official, incredulous, says, “You didn’t even measure like the other guys! How did you come up with such a high figure?”

The Chicago contractor whispers back, “$1000 for me, $1000 for you, and we hire the guy from Tennessee to fix the fence.”

“Done!” replies the government official.

And that, my friends, is how the new stimulus plan will work.

Feb 26 04:48 AM

[da'zman:]

Good analysis and clearly politician's numbers never add up. The only way we will get out of this mess is through (stag)inflation. We've done it before and we'll do it again.

Feb 26 04:53 AM

[CLH:]

The answer is quite simple. Most of the money will come from the middle class. The big mistake everyone is making is believing Obama (or any politician). When his mouth opens lies come out.

Feb 26 06:32 AM

[no wizard:]

I believe what he said was "no family" making more than $250,000....

Feb 26 06:38 AM

[kelm:]

This is a naive analysis. What programs is he cutting? he stated in the speech that there were some massive program cuts. budget is released today and we can all get "data" as opposed to just guessing.

Feb 26 10:02 AM

[henarl:]

Of course it doesn't add up. When is the last time any federal budget "added up" and didn't exceed it's original figures? Politicians tell the public what they think the public wants to hear - like cutting the deficit in half in four years. Obama knows that aint gonna happen but he needs to throw that lie to the population to maintain his popularity rating so he can get all of the rest of his crap thru Congress.

Feb 26 11:04 AM

[milkchaser:]

The other way out of this is to stop running up the deficits. Stop the Obama steamroller. Obama claims that he is going to cut $2 trillion from Federal spending. Yeah, right. If this were politically feasible, why didn't he propose this when he was in the Senate. If he were able to do this, he would be a miracle worker.

But none of this adds up. The Federal Budget last year was $3 trillion and most of that was untouchable entitlement spending (which happens to be fully funded). He wants to add a $trillion or so of distinct new spending. Where is he going to cut? If he plans to cut spending, doesn't that work against the model of stimulating the economy via spending?

Don't the American people see how contradictory and unwise this is?

Tomorrow across the nation, people are going to protest. We are holding "tea parties". The protest in Tampa is going to be at the Sam Gibbons Federal Courthouse at noon. Go to the FreedomWorks site to find the protest in your city.

cts.vresp.com/c/?Freed...


On Feb 26 04:53 AM da'zman wrote:

> Good analysis and clearly politician's numbers never add up. The
> only way we will get out of this mess is through (stag)inflation.
> We've done it before and we'll do it again.

Feb 26 01:28 PM

[milkchaser:]

It's easy for Obama to keep the promise that nobody earning less than $250K "will pay a dime in extra taxes". They'll pay a lot more than a dime. Promise kept!

The carbon caps are going to be the big revenue raiser. There is some merit to this kind of tax. It's a consumption tax. It encourages conservation. But best of all (from Obama's point of view) it is a hidden tax that is not directly collected from income and payroll taxpayers. Hence, he seems to keep his promise (while cleverly breaking it).

Feb 26 01:41 PM

[Thomas J. G...:]

The Laffer Curve is Atlas Shrugged writ large. Obama can raise taxes but he's not going to collect any more. There will be a lot less families making 250k now than in 2006. At the current time all economic decisions have the imprint of a more free market friendly gov't that went before. It will take time for Obama to make his imprint and kill most incentives. When the Obama employment unfriendly incentives start to kick in, there will be even less families making 250k. This has all happened before and Reagan came in and cleaned it up. How long will it take this time?

I'm getting concerned about the tax situation. I think I heard that half the people don't pay any taxes at all. Isn't there something in the constitution about the majority not being able to force their demands on the minority. Are 70% of the people voting in people who will give them things (free health insurance, 2 yr unemployment insurance...) financed by punative taxes on the "rich"?

Feb 26 06:20 PM

[mediapro:]

Where do I begin to respond to such a rambling, outrageous analysis?

Since the author mostly focused on the implications of healthcare costs and their onerous burden on the middle class, why not there?

I would encourage everyone to read today's SA post:

seekingalpha.com/artic...?

The following is my own analysis in response to that article and would be interested in any reactions:

What Digital (a Canadian poster in response to the article) failed to add was that the cost of drugs in Canada and in many other countries in the world is roughly 50% of their cost in the U.S. The average annual administrative overhead rate for a U.S. HMO is ~27%, while Medicare's rate fluctuates between ~2-3%.

Our dirty secret is that we allow the fractured health care system in this country to exist because it benefits the corporatocracy. The drug makers argue, "We need that revenue keep advancing drug development and delivery", while they spend ~30% of operating revenue on marketing. The Hospitals are in the uncomfortable position of guaranteeing excellent healthcare to the impoverished and near-poor and subsidizing this "emergency room entrance" on the backs of those who pay through the nose for healthcare in this country. The doctors scream about lawsuits and declining compensation while they enjoy billable rates that eclipse every other industrial country. And the insurance companies literally freak out when they see the potential of losing their cash cow to a centralized health system.

In my productive life I have contributed nearly $500,000 in premiums and co-pays for the, thank God, pittance of care that I have required. My joke with colleagues is that I am a walking profit center for Kaiser.

There's got to be a better way, and I think my answer is the simplest and similar to Obama's. Transition from an employer-based, taxpayer subsidized system of health insurance by:

1. Immediately allowing an early buy-in to Medicare for all persons age 50+. There has been a bill sitting in Congress for nine years that would allow early buy-in for those 55+. While we often decry the ability of government to do anything right, ask anyone 65+ what they think about Medicare and the alternatives for them if it did not exist.

2. Move from individual employer-based health insurance to one that forms regional pools for business owners and a private entity to negotiate directly with hospitals, PPOs and drug companies for these larger risk pools in exchange for a government subsidized administrative rate similar to Medicare. As much as vested interests complain about Medicare reimbursement, this huge pool of members is a powerful tool in getting excellent care at rates that the rest of us can only dream of.

Oh yes, and if the author wants to quibble about marginal tax rates and who and who is not rich, please answer the following:

Consider the following four giant effects on tax policy that those who only look at the income tax seem to conveniently forget:

1. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

The attempted movement away from an oil-based economy is long overdue. Eliminating these subsidies and replacing them with a carbon tax and offsets would be a dandy replacement for current outlays while returning the investment towards modernizing the electrical grid and smart energy technologies while contributing towards deficit reduction. Even an oil guy as purile as T. Boone Pickens has attempted to wake up and smell the coffee.

2. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck. If one wants to make the small farmer argument, then set resdiency, gross receipts and size requirements on farm subsidies. This reward for planting inefficient crop supply and for NOT PLANTING crops drawfs even the oil subsidies.

3. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

4. Finally, would someone please explain to me why there is a ~$100 K cap on wage contributions to Social Security?

Are you considering these tax subsidies to the wealthy when you make your observations? And please realize that the 2011 marginal tax structure would be basically returning marginal rates to those that existed at the end of Reagan's term of office?

Feb 26 07:10 PM

[Tony Petroski:]

The numbers won't add up: 1) Taxing rich people is like hitting a moving target. They adjust their activity in order to avoid becoming enslaved, so the hoped-for revenue doesn't materialize. 2) The "rich" aren't a fixed group of folks who descend from those who got off the Mayflower. This year's "rich guy" is next year's "working family." Taxes on
"the rich" have the big disadvantage of killing off the up-and-comers. The Clintons of the world don't need big incomes, they already have their pile. Having rich guys ally themselves with "95% of all hardworking Americans" was what Milton Friedman called the tyranny of the status quo. Is that the change we can believe in? 3) Huey Long: "Don't tax you, don't tax me, tax the feller behind the tree." My guess is that 45% of hardworking Americans know that the tax burden is going to get
larger and is going to fall on them.

Feb 26 07:11 PM

[mediapro:]

Mr. Gordon.

If the Laffer Curve is Atlas Shrugged writ large, Ayn Rand must be turning in her grave.

The Laffer curve rises again!

Just a few minor points.

1. Tax collections fall to zero at 100% tax rate. This is always stated as a Laffer truism. However, there are many examples of people working for nothing (which is an equivalent thing). The one that comes to mind were the "dollar a year men" of the WWII era. Obviously money wasn't the motivator in their case. Charity work could also be cited.

2. There is a curve between the two zero points which has a maximum point for tax collection. This is also stated as a truism. In fact there are an infinite number of curves that can be drawn between the two points and there is no evidence that a parabolic shape is the correct one.

3. Taxes are in brackets so there is no reason to believe that there is only one Laffer curve. There might be a different curve for each bracket since people at different economic levels respond to different stimuli.

4. For the Laffer curve to have any value as a policy tool it should be presented with appropriate data points in any discussion. However, no one ever does so, it is always discussed in theoretical terms. If no one can display the curve how can those who quote it claim that we are on the side where lowering tax rates will raise revenue?

The Laffer curve doesn't exist.

If one is to simply look at marginal rates as the measure of tax policy, please answer the following and why conservatives never mention these aspects iof tax policy:

Consider the following four giant effects on tax policy that effectively transfer middle class income to the wealthy.

1. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

The attempted movement away from an oil-based economy is long overdue. Eliminating these subsidies and replacing them with a carbon tax and offsets would be a dandy replacement for current outlays while returning the investment towards modernizing the electrical grid and smart energy technologies while contributing towards deficit reduction. Even an oil guy as purile as T. Boone Pickens has attempted to wake up and smell the coffee.

2. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck. If one wants to make the small farmer argument, then set resdiency, gross receipts and size requirements on farm subsidies. This reward for planting inefficient crop supply and for NOT PLANTING crops drawfs even the oil subsidies.

3. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

4. Finally, would someone please explain to me why there is a ~$100 K cap on wage contributions to Social Security?

Are you considering these tax subsidies to the wealthy when you make your observations? And please realize that the 2011 marginal tax structure would be basically returning marginal rates to those that existed at the end of Reagan's term of office?
On Feb 26 06:20 PM Thomas J. Gordon wrote:

> The Laffer Curve is Atlas Shrugged writ large. Obama can raise taxes
> but he's not going to collect any more. There will be a lot less
> families making 250k now than in 2006. At the current time all economic
> decisions have the imprint of a more free market friendly gov't that
> went before. It will take time for Obama to make his imprint and
> kill most incentives. When the Obama employment unfriendly incentives
> start to kick in, there will be even less families making 250k.
> This has all happened before and Reagan came in and cleaned it up.
> How long will it take this time?
>
> I'm getting concerned about the tax situation. I think I heard that
> half the people don't pay any taxes at all. Isn't there something
> in the constitution about the majority not being able to force their
> demands on the minority. Are 70% of the people voting in people
> who will give them things (free health insurance, 2 yr unemployment
> insurance...) financed by punative taxes on the "rich"?

Feb 26 07:18 PM

[Leftfield:]

Mediapro, thanks! I'm so sick of well-off people calling hard-working stiffs who have lost ground for decades freeloaders by looking only at income tax. Social security is really rough on the self-employed and quadrupled since the early 80's. (Greenspan did that, too, in the "Blue Ribbon Committee "solution). Real estate tax pays a lot of freight an is devastating to lots of people, causes them to lose their houses. Has skyrocketed as municipal employees retain middle-class status at homeowner's expense.

Thanks for the education on just some major scams. It's hard to imagine the nerve of the recipients and their congressional enablers. It's rife in our system and is economically and environmentally incredibly damaging. Why doesn't the climate-change crowd wake up to ways that would help the ordinary person and achieve their goals?

I bought a slum 2-family rental unit a couple of months before Reagan eliminated the interest deduction on investment property. Retroactively. Leaving vacation home deduction intact, nice for the already prosperous. Hurting the resale market on my property, of course, while I spent years dealing with awful tenant protection laws and incredible tax and utility increases, thanks, government.

Yachts are deductible if you lease it out one day/year for fishing. Don't need to catch fish.

Obama is lying. Because he is proposing. Too bad the average citizens can't work together to eliminate outrages that hurt us badly instead of taking sides over litmus tests that only allow this system to perpetuate.

At the time of the Boston Tea Party, the public debate centered over staying the course during the resultant British blockade as a gift on principle to future generations. All we have to do is finally live within our means like people should.

Feb 28 07:08 PM

[schnickelfritz:]

Hey clueless, it's called "common sense," something which you don't have and never will. It doesn't matter how intelligent you think you are, "common sense" is something the left will never be able to grasp.

Obama lied.
The economy died.


On Feb 26 05:18 PM WAKEUP wrote:

> This article states, "If he succeeds in getting universal healthcare,
> the middle class will find themselves eventually saddled with huge
> new tax burdens..." HOW DOES THE AUTHOR "KNOW" THIS? WHERE DID THIS
> COME FROM? THE AUTHOR IS FROM A RIGHT WING BACKGROUND. THIS SOUNDS
> LIKE MORE ELECTION-LOSS SOUR GRAPES; SIMPLY A GEORGE BUSHMAN RANTING
> THAT THE REPUBLICANS SHOULD HAVE BEEN KEPT IN POWER. NO. THAT POWER
> SLIDE IS OVER, AND THE RUNNER IS OUT.

Feb 28 10:42 PM