NCPA - National Center for Policy Analysis

Higher Taxes on Rich May Prove Bad Fiscal Policy

April 19, 2011

President Obama wants higher rates and fewer breaks, but only for the over-$250,000 set.  That may or may not work politically, but as fiscal policy it's likely to make a bad situation worse, says Investor's Business Daily (IBD).

Internal Revenue Service data tell why.

  • Over an adjusted gross income threshold of $200,000 total taxable income from all returns was $2.061 trillion in 2008 (the latest year available).
  • This income generated $531 billion in taxes.
  • Let's say the top rate had been the Clinton era 39.6 percent instead of 35 percent, and the capital gains rate was back to 20 percent.
  • That would have raised the 2008 tax yield by about $50 billion.

Even assuming 2010 incomes are higher than in the recession year of 2008, these rate hikes don't add up to serious deficit relief.

Since the last real reform in 1986, the tax system has been tweaked with credits, deductions and rate adjustments into a highly progressive structure.

  • The bottom half of earners pay almost nothing and the top 1 percent pay close to 40 percent.
  • The bottom 90 percent, which in 2008 included all returns with adjusted gross income of up to $114,000, were paying 30 percent, down from 44 percent in 1987.

As the tax system has grown more top-heavy, its revenues have also grown more volatile.  Very high incomes are produced not so much by wages and salaries but by capital gains and bonuses, which rise and fall with booms and busts.  In good years, the government gets a windfall; in bad years, revenues collapse, but the spending can't be so easily rolled back.

Source: "Soak Rich, Bust the Budget," Investor's Business Daily, April 15, 2011.

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