Remember those fun college days when instead of studying you went to that party you really should have skipped and then you had to hope that the all night store was open so you could buy a Cliff Notes version of the book you didn’t read? Well, for those of you who have not been in the weeds on the “fiscal cliff” issue, here is the Cliff Notes version.
Obama wants to raise individual income taxes and further attack the creation of wealth. Taxes are scheduled to rise dramatically on January 1 due to the expiration of the Bush era tax cuts. Obama is very forthcoming about his willingness to engage in class warfare (one of the few things he is actually upfront about) and his desire to tax the “rich”. Don’t worry though, because the “rich” may include you. The left is so “inclusive”!!
But there is a catch. Higher tax rates will not lead to more tax dollars flowing to the Treasury. Higher rates will, however, result in tax avoidance strategies, deferring of income and gains, decreasing investment, etc. until the tax climate improves. The only result of higher tax rates is a weaker economy which will lead to a larger, not a smaller deficit. Only cutting spending will solve the deficit problem and avoid the fiscal cliff.
Just for grins I googled the words “New York City public salaries” and got a link to seethroughny.net Pay dirt! Working for New York City can be very lucrative, putting one comfortably into the “rich” category! Working for the Department of Environmental Protection appears especially remunerative. Check this out and you will see a chart of folks making pretty good moola. Do you think they voted for Romney? Do you think they think they are rich? But I digress.
Anyway, here is the real point. The federal deficit is projected to run about $1.2 trillion for the current fiscal year. Will raising taxes help reduce the deficit? No, because higher tax rates do not lead to more tax dollars flowing to the Treasury. Actions (especially tax rate increases) have consequences and individuals and businesses react to protect themselves.
From the Tax Policy Center I found tax data for 2008 (the most recent I could find) for high income earners, in this case, with incomes of $200,000 or more (not really “rich” in my book). There were 3,841,459 returns filed with salaries and wages totaling $1,206,006,303,000, adjusted gross income of $2,462,007,963,000 and taxable income of $2,060,968,496,000. The tax received was $537,481,728,000.
Ok, now think about these numbers. If the annual federal deficit is $1.2 trillion and the taxable income of all returns with income over $200,000 is about $2.0 trillion, then it would require a total tax take of about $1.7 trillion (the $537 billion paid plus an additional $1.2 trillion) to balance the budget on the backs of these people. However, that implies a tax rate of about 82.5% of taxable income ($1.7 trillion divided by taxable income of $2,060,968,496,000). Do you see where I am going here?
Tell me, do you really think that tax rates could skyrocket without dire consequences to the economy? Of course not. Can you spell Greece or France? If taxes were increased to suck another $1.2 trillion out of the economy then the economy has to shrink by that amount. In other words there is really a smaller economy to tax. It does not take long for the people being taxed to death to realize that they need to avoid onerous taxation. Guess what they do? They find ways to defer taxable income, stop making investments because the net after tax return is too low and they lobby Congress for various tax breaks, etc. that benefit higher income people. In the end the Treasury does not actually receive the dollars it thinks it will get but it does spend all the money it thinks it will get. Hence the result that tax increases lead to larger not smaller deficits.
In a nutshell we need to cut spending or else.