Will Obama’s Budget Plans Help the Poor by Taxing the Rich?

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One of the corner stones in President Obama’s recently announced $3.6 trillion budget was to raise taxes on the rich in order to cut the budget deficit and fund many of his ambitious programs over the next decade. The prime focus of his tax reforms were the richest 2% of Americans who have household earnings of more than $250,000 and control more than 30% of the nation’s wealth. Everyone else he said, “won’t see their taxes increased by one single dime.” Here is a quick recap of the main tax cuts for the rich proposed in the budget:

  1. Let former President George Bush’s tax cuts expire for families making more than $250,000. This would mean reinstating the top two Clinton-era tax rates of 36 percent and 39.6 percent in 2011, up from the 33 percent and 35 percent the richest Americans now pay.
  2. Raise taxes on capital gains and dividends to 20 percent for top earners, up from the 15 percent set by former the President.
  3. To partially fund his $634 billion health care proposal he would also limit tax deductions for upper-income individuals and families, raising about $318 billion over 10 years.

But will raising taxes on the rich really lower our deficit spending and fund programs to help the remaining 98% of Americans?

Taking the “No” side of the argument was a recent report in the WSJ, which argued that Mr. Obama is selling the country on a 2% illusion because raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can’t possibly raise enough revenue to fund the 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. 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.

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.

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 been [vital] in allowing them to increase profits and hire more staff.

The article goes on to argue that taxes on the not-so-rich will also need to rise and that the reality is that the only way to pay for Obama’s ambitions is to reach ever deeper into the pockets of the American middle class.

The other side of the argument, is that the trickle down effect does not work and that far too much wealth was concentrated amongst the richest Americans, many of whom include CEO’s and other Wall Street executives that got the nation into the current financial crisis. Statistics do show a growing inequality amongst Americans and President Obama was elected on his campaign promises to help everyday Americans now and into the future. This was indeed reflected in his budget which provided tax cuts (extending the $800/$400 credit in the stimulus plan) to 95% of Americans, improving education grants and making health care more affordable over the long term.

Wherever you stand on the budget, there is little doubt that it represents a huge break, not just with the policies of the past eight years, but with policy trends over the past 30 years. If he can get anything like the plan he announced on Thursday through Congress, he will set America on a fundamentally new course. This was the opening stanza in Krugman’s NY times Op-Ed piece, in which he went on to conclude that “this budget looks very, very good.”

This budget and Obama’s spending plans have deeply divided Congress and the nation (including many readers of this blog) with supporters hailing Obama as a modern age Robin Hood, while opponents say he is going to fall into the same hole as his predecessors who tried – and failed – to tackle health care, social security and regulatory reform. Only time will prove who was correct and the consequences will redefine the nation.

Personally, I am not a huge fan of all the rapid, large scale spending and bailouts, but I do think some level of wealth redistribution will boost the nation over the longer term. The key is make sure policies implemented in times of crisis do not become permanent when normal times return.

What say ye?

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2 Comments on "Will Obama’s Budget Plans Help the Poor by Taxing the Rich?"


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[…] new measures to reduce the tax bite for most Americans making less. One of Obama’s budget proposals is to extend the 2001 and 2003 Bush tax cuts for everyone except high-income tax filers, which was […]

[…] to and get the stimulus payments sooner, thereby increasing your monthly cash flow. You may not like all the money being thrown around by the government, but the spending bills have been passed so […]

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