Déjà vu 2008

Earlier this year I wrote an article examining the claim that increased taxation on individuals making $250K or more would curb our Federal budget deficit and pay down the debt. President Obama made that claim during the 2008 election cycle and well into his presidency. The math showed that claim to be wildly untrue and betrayed the most probable motivation for making it: Obama wanted to excite the 47% who pay no Federal income tax in order to score votes.

Here we find ourselves in 2011 entering an election cycle where Obama is vulnerable on the #1 topic on most American’s minds, the economy. Facing disenfranchised voters and a Democratic base whose support is wavering, the President has seized upon the time-honored strategy of class warfare. Now that’s a strong claim, but I’m only willing to make it if the numbers support it, and as you’ll find below, they do.

Breaking Down the Numbers

Let’s take a look at what affect a $1 million dollar earner tax would have on our deficit and national debt. All figures in the list below are based on latest available IRS tax data from irs.gov: 2009 IRS SOI Tax Stats.

• Of the 104.2 million Americans who filed 2009 tax returns, 235,665 (0.23%) earned $1 million or more
• The combined gross income of this group was $626 billion ($626,464,479,000.00 exact amount)
• The total tax revenue generated from this income group was $182 billion ($182,369,749,000.00 exact amount), which represents 19.13% of all Federal income tax revenue
• The IRS tax data shows the average effective Federal income tax rate paid by this income group was 29.11%. In contrast, the largest middle class group of wage earners (the $50,000 to $75,000 bracket) pay an effective tax rate of 14.17%, less than half that of million dollar earners. The claim by the Obama administration that million dollar earners pay taxes at a lower rate than middle class earners is absolute fiction.

The Results

Now that we’ve reduced the IRS tax data to usable figures, lets see what kind of dent we can make on the deficit and national debt:

The annual budget deficit is 1.4 trillion dollars. However, you must add back in the $182 billion in taxes from million dollar earners to create a baseline, which means our real deficit starting point is 1.582 trillion.

Let’s assume we collectively feel the current effective tax rate on million dollar earners of 29.11% is not enough and opt to grab our pitchforks and torches. Below are higher effective rates we could impose, including their effect on the deficit – remember these figures are based on effective tax rates, not loophole-riddled, deduction-filled tax brackets:

• 35% effective rate = $1.36 trillion deficit, a reduction of 2.64%
• 50% effective rate = $1.27 trillion deficit, a reduction of 9.35%
• 75% effective rate = $1.11 trillion deficit, a reduction of 20.53%
• 100% effective rate = $956 billion deficit, a reduction of 31.72%

Any claim that tax increases on million dollar earners under a Buffett Rule would reduce the national debt are demonstrably false. In fact, forget the national debt, you couldn’t even reduce the annual Federal budget deficit by a third if you took every last penny these people earned. When you include servicing the national debt, any small annual deficit reduction achieve from taking 100% of million dollar earner incomes would pale in comparison to the tidal wave of interest we will soon be drowning in.

Don’t Be Lame, Do The Math

When you hear promises from politicians of a quick economic fix of any kind, please do our democratic republic a favor and investigate it before you vote one way or another. In this case the Obama administration is using a false premise to invoke class warfare in an attempt to secure votes, what else have you fallen for? Moral of the story: Spend an evening doing the math and getting informed, it’s not rocket science.