NCPA - National Center for Policy Analysis


February 26, 2009

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 percent 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, says the Wall Street Journal. 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 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 percent":

  • Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006 (that's about 7 percent 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 percent of all federal individual income receipts.
  • The richest 1 percent -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9 percent of all income tax revenues, while earning about 22 percent of all reported U.S. income.

Note that federal income taxes are already "progressive" with a 35 percent top marginal rate, and that Obama is (so far) proposing to raise it only to 39.6 percent, 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 Obama is going to need, says the Journal.

Even if Obama goes beyond the 42 percent top rate and confiscated 100 percent of the taxable income of everyone in America earning over $500,000 in 2006, this would only have given Congress an extra $1.3 trillion in revenue, says the Journal.

Source: Editorial, "The 2% Illusion; Take everything they earn, and it still won't be enough," Wall Street Journal, February 26, 2009.

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