Barack Obama’s plans to “spread the wealth around” rely on the idea that under his policies, there would still be plenty of wealth to spread. But is this the audacity of bad math? Obama’s promise is that only those who have achieved Joe the Plumber’s dream of making more than $250,00 per year would pay higher taxes, and almost all lower-income Americans would get a bundle of “tax benefits.” Should we believe him? Or is Obama’s tax “Change” a trainwreck-in-the-making?
Below is a letter addressed to a future President Obama. It spells out how Obama’s promises of “Change” would have to drive up the marginal tax rates on Joe’s dreams to 92% — and in the end, the regular Joes would still get soaked. (Full disclosure: this letter came by way of some emails that family and friends have been swapping around; the author is my brother, Joshua Rosett, who has a Princeton Ph.D. in economics and teaches financial accounting at California’s Claremont McKenna College. Discount as you like for family ties, but he’s not a politician making promises, he’s Josh the Economist, trying to figure out what’s about to happen to his income — and I think this is a letter worth sharing):
Dear President Obama,
During the campaign you repeatedly said that if I make $250,000 or less, my taxes will not go up by even “one cent.” When McCain called you on this, you mocked him.
Therefore, my plan is to stay under $250,000 per year from now on, and to use the 2008 tax code to file my taxes. That will ensure that I do not pay one cent more. Of course, I have the capability to make more and contribute more to our national productivity, but I do not think it will make sense for me to do so. Here is why.
First off, let’s assume that you will not raise spending so that we can focus just on taxes.
On the campaign trail, you’ve also repeatedly promised $1000 “tax reduction” to 95% of workers and their families ($500 for individuals). It also says this right on your website, here. (“Cut taxes for 95 percent of workers and their families with a tax cut of $500 for workers or $1,000 for working couples.”) Since there are over 110 million households in the lower 95%, this adds up to transfers from the top 1.5% of households (that is how many make over $250,000) to the bottom 95% of maybe $80 billion per year.
Evidently the roughly 3.5% of households that make less than $250,000 per year but are above the 95th percentile will get no tax reduction but also not pay once cent more in taxes. That applies to all households in approximately from roughly $150,000 to $250,000.
That leaves you with 1.7 million households making $250,000 per year or more. Based on figures for 2005, in total these households make about $562 billion per year. That’s a lot of money! And you only have to take about a seventh of it to pay for your transfer. However, your website also promises to raise their top marginal rate to no more than about 39% (your website says “But no family will pay higher tax rates than they would have paid in the 1990s.” Since the current top marginal rate is 35%, that is an increase of 4%. Assuming that rate only applies to income above $250,000 (otherwise the taxes on those below $250,000 would see their taxes go up at least a cent), that leaves $562 billion – 1.7 million x $250,000 = $137 billion that could be taxed at a rate higher than 35%. 4% of $137 billion is just under $5.5 billion, which is a bit short of the $80 billion needed.
So your tax policy alone will result in about a $75 billion shortfall per year compared to our current tax system, which is already running a very large deficit.
So what marginal top tax rate would allow you to pay for this transfer? Assuming that those earning over $250,000 are happy to continue working as hard as they do even if you greatly increase the taxes on their earnings over $250,000, the top rate would have to be approximately 58% higher than the 35% rate to pay for the $80 billion transfer to the lower 95% of the distribution. That is, the top rate necessary to pay just for the first item promised under the tax heading on your website would require a top marginal rate of about 93%.
OK. So you are only off by about a factor of about 15 on how much you will raise the top rate to pay for the “spreading the wealth around” part of your economic plans. No big deal.
There is just one problem with this. If you tax every dollar of earnings above $250,000 at 93%, no one will bother working to make more than $250,000. Suppose you are able to earn $125 per hour (just about enough to make $250,000 per year). If you get to keep 7% of that, after tax earnings on each dollar above $250,000 would fall to $8.75 per hour. Do you think people in that tax bracket will do a lot of extra hours at $8.75 per hour?
But of course you promise a lot of additional tax cuts on your website: “Provide generous tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth.” Hard to say how much more you will have to raise the top rate to pay for this, since you don’t define “generous”. So let’s call it 7% on top of what we figured above. That would provide an additional $9.5 billion per year to pay for all of the other generous tax cuts you propose. However, it also brings the top rate to 100%. It’s not too wild a guess to say that no one earning $250,000 per year will do additional work if they get to keep none of the additional money they earn.
Then you also promise a lot of additional spending. Estimates are a trillion dollars over the next four years. So let’s be conservative and call it $200 billion per year. How much more do we need to raise the top rate to pay for this? Well, if we stick to just the household income above $250,000 per year, the top marginal rate necessary to bring in $289.5 billion ($80 billion for the transfer + $9.5 billion of other generous cuts + $200 billion in new spending) is 246%. However, you can’t raise the rate beyond 100% (at least, I don’t think you can), so perhaps you can start taxing income below $250,000 per year to pay for this additional spending. So you will quickly discover that you will have to raise taxes on maybe just a few more people. Maybe even everyone who actually currently pays income tax.
Hence I plan to hold you to your word, make no more than $249,999 per year, and pay using the 2008 tax schedule to ensure that I will not pay one cent more than before.
Good luck balancing your budget.
Best wishes,
Joshua Rosett
Professor of Economics and Accounting
Claremont, CA
[Ed. Note: As initially posted, the calculations above pointed to a 92%, marginal rate on Joe's ambitions. Adding in some additional relevant information, that turned out to be optimistic -- as explained in the revised text above, Joe's marginal rate would actually come to 93%.]
Coal States Beware!!!!
Obama admits to wanting to bankrupt the coal industry…
And don’t believe the story that voter registration fraud does not equate to actual voter fraud…which means McCain Palin had better get out the vote!
http://scattershooting.wordpress.com
246%, might not be enough, thanks for the accounting 101 lesson, Joshua. Well done.
Anyone who believed that someone looking to “repair the unfairness” of your income, your 401k (and your granddaddy’s 401k?), was never looking at the $250,000 earner.
A redistributor of income for the purposes of cleansing the “unfairness” of your income, will find “unfairness” where he needs to find it.
$200,000? Sounds unfair to me. $150,000? In class warfare, which side do you think you are on? I would duck and cover.
If you make $10,000 gross per month, do you believe you can’t be CALLED “rich”? Think again.
If you are given national health care, national insurance, nationalized 401k’s, national utilities, nationalized energy, …then you don’t need all that income, all that property, all those goods. Turn your heat down, quit eating so much, you consumerist, capitalist pig. The state provides for you, once we strip your military budget and open your borders to our loyalists…you will never have enough votes or power to resist our benificence, although there may be a few million more mouths for you to feed.
“Not all of what these people sought was strictly religious. . . . It occurred to me that Trinity, with its African themes, its emphasis on black history, [was] a redistributor of values and circulator of ideas. Only now the redistribution didn’t run in just a single direction from the schoolteacher or the physician . . . to . . . the sharecropper or the young man fresh from the South. . . . The flow of culture now ran in reverse as well, the former gang-banger, the teenage mother, had their own forms of validation—claims of greater deprivation, and hence authenticity”
Senator Obama on the value of the Trinity method of class and racial warfare ragings. A redistribution of values is the underlying value.
“I don’t want to just end the war . . . I want to end the mindset that got us into war in the first place.”
In a 2002 speech, he said the war resulted from:
“…the cynical attempt by Richard Perle and Paul Wolfowitz and other armchair, weekend warriors . . . to shove their own ideological agendas down our throats, irrespective of the costs in lives lost and in hardships borne . . . the attempt by political hacks like Karl Rove to distract us from a rise in the uninsured, a rise in the poverty rate, a drop in the median income . . . the arms merchants in our own country . . . feeding the countless wars that rage across the globe.
So, it appears that we have two main thoughts here. We need to redistribute the military, redistribute the “Zionist influence” and and redistribute our political friendships and alliances.
By kicking three papers off the plane, refusing to engage with anyone who asked a tough question and refusing to appear with them ever again, calls to action to shout down dissent and inquiry, and by using the entrenched media as shills, we are witnessing merely the “redistribution of information”.
By bankrupting producers of coal and waging warfare against nuclear and drilling advancements, we are witnessing merely the redistribution of energy to the country.
Redistribution is always patient and kind
it is never jealous
redistribution is never boastful nor conceited
it is never rude or selfish
it does not take offense neither it is resentful
redistribution takes no pleasure in other people’s sins
but delights in the truth
it is always ready to excuse, to trust, to hope and change
and to endure whatever comes
fair
Well, it’s clear from this well thought out letter that Obama will be printing money pretty soon.
The only problem with that is that printing money will increase inflation dramatically, which in turn effecitively reduces the value of Social Security.
Good luck to any Senior who votes for Obama.
Obama can’t go back on his promises of programs but he can change, what a lovely word, onto whom he taxes and that will be almost all of us. He will announce to the world that the tax increases is due on the failure of Bush making such a mess out of the economy. Bush will be blame for the failures of Obama for the next four years. The American people will praise the Almighty One Obama and continue to hate Bush. The drive by media will sing Amazing grace and we the people, will smile while we slide down the hill with a lot less wealth.
R
Rosalie, exactly.
But that hill is 40% less wealthy already, thanks to Barney Franks, Franklin Raines, and ACORN/Obama.
I never thought we would see another Depression, but the idiot redistributionists are on target to create one.
All it will take now is raising taxes.
Look at the bright side all you puveyors of doom and gloom. This will create an niche industry boom of people heading to low cost countries to retire. Countries like Mexico, Costa Rica, Philippines and the like will boom as Gringos move there to take advantage of low cost and high quality standard of living. We boomers will become citizens of the world and the developing world will reap significant benefits in the process.
In two years I am off to the Philippines where I will have 2 maids, a driver, nanny for my son, membership in 3 clubs, private school for junior + a 6600 sq ft home and a smaller one on the beach………all for peanuts.
Every cloud has its silver lining. If President Obama makes living in the USA fiscally unattractive there are alternatives. He will probably lower the cost of vacationing back there to visit relatives (assuming some are left)as well.
The other piece of the equation is the impact that Obama’s policy proposals would have on the cost of living. These are potentially huge and include 1) taxing payrolls to fund medical care, 2) increases in the minimum wage and 3) cap and trade on greenhouse emissions. Furthermore, taxing the inputs of high income people into the economy will not only reduce those inputs, it will also raise their cost, costs which we all pay. We can expect that the American standard of living will decline to the level of Western Europe.
In reality, the only way America will be able to pay for the Obama welfare state is the way the Europeans do it, a large VAT which will drive up the cost of living for everyone. The VAT seems to be the only way to fund a welfare state without killing the economy through confiscatory marginal tax rates.
Yes, well, this is just as it relates to households. The caveat is that he will bring business to it’s knees with a revised corporate tax structure that will surely be used to make up any shortfall that you and I can’t pay. That and cutting spending for the military which he abhors. Then business will pass on cost increases to us till we can’t take any more and finally move out of the country. He will try and prevent that since they will control everything, including the judicial system, and our economy will go down the tubes. China and everyone else will just love that. And we thought times under Jimmy Carter were bad? A piker compared to Obama.
Simple.
“So what marginal top tax rate would allow you to pay for this transfer? Assuming that those earning over $250,000 are happy to continue working as hard as they do even if you greatly increase the taxes on their earnings over $250,000, the top rate would have to be approximately 58% higher than the 35% rate to pay for the $80 billion transfer to the lower 95% of the distribution.”
Your argument rests on the premise that he will have to raise the marginal rate higher than promised, to make up for the 80 billion dollars he would like to “transfer.”
You’re forgetting that he can always cut programs and rewrite/eliminate entitlements as he pleases (assuming Congress approves *any* of this.)
You’re also forgetting he plans on having us out of Iraq in some 16 months after entering office. The war costs over $100 BILLION a year. Even if he takes two years to get us out of Iraq, and or whatever reason he still needs to spend HALF of that over the last two years of his term, thats still $100 billion, with $20 billion in change.
Talk about making an argument in a vacuum.
In retrospect, 8 and 1/2 months later, my estimates were far too conservative. As for J. Williams above, it is evident that all of his income will soon be sucked up by the vacuum he references.