Despite his expressed desire to raise taxes on "millionaires and billionaires" it's not likely that President Obama is as concerned about taxing the rich as he is about taxing the middle class. He won't say this, of course, because he promised during his campaign never to raise taxes on those making less than $250,000, but taxing the middle class is the necessary consequence of his refusal to cut spending. If we're going to pay our bills we have to get the money from the people who have it, and that's the middle class, as this graph from
an article at the Wall Street Journal shows.
The Journal editorial explains why taxing the rich will not produce the revenue needed to close the deficit. Here's the core of their argument:
A dominant theme of President Obama's budget speech last Wednesday was that our fiscal problems would vanish if only the wealthiest Americans were asked "to pay a little more." Since he's asking, imagine that instead of proposing to raise the top income tax rate well north of 40%, the President decided to go all the way to 100%.
Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is.
Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.
Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That's five times Mr. Obama's 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.
So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The above chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.
Mr. Obama is turning as he did last week to limiting tax deductions and other "loopholes," such as for mortgage interest payments. We support doing away with these distortions too, and so does Mr. Ryan, but in return for lower tax rates. Mr. Obama just wants the extra money, which he says will reduce the deficit but in practice will merely enable more spending.
Mr. Ryan isn't proposing controversial entitlement reforms because he likes pointless political risk, or because he likes being berated to his face from a front row seat, as he was on Wednesday. Medicare and Medicaid spending are consistently growing two to three times faster than the rest of the economy, while Medicare's cash-in-cash-out financing model means that seniors collect far more in benefits than they paid in taxes over their working lifetime. The entitlement state was designed for another era.
Mr. Obama's speech was disgraceful for its demagoguery but also because it contained nothing remotely commensurate to the scale of the problem. If the President had come out for a large tax on the middle class, like a VAT, then at least the country could have debated the choice of paying for the government we have or modernizing it a la Mr. Ryan so it is affordable.
Instead the President will continue targeting the middle class for tax increases to pay for an entitlement state on autopilot, while claiming he only wants to tax the rich.
And another campaign promise will be flushed down the memory hole.
