President Obama’s much hyped budget address in front of a George Washington University audience Wednesday has been widely viewed as the first speech of the 2012 presidential election campaign. One could be forgiven for forgetting that Mr. Obama was addressing the nation as a president seeking reelection and not as a first term junior senator from Illinois, as it was the 2008 campaign that the speech recalled.
The president’s favorite bogeyman, President George W. Bush, featured prominently, just as he has for most of President Obama’s major speeches. The class warfare rhetoric was back in full force Wednesday too, as the president argued that all of the country’s financial woes would simply vanish if only those heartless Republicans would agree to rescind the Bush tax cuts of 2001 and 2003 -- the same tax cuts Obama himself agreed to extend less than six months ago.
If the president and his advisors think that they can win a second term by dragging the same old tired rhetoric and petulant political attacks before the voters again like raw steaks before the pride, they may find the lions less hungry for the offering this time around. Mr. Obama’s one-two punch strategy of tax the rich and bash Bush just doesn’t stand up to the numbers.
According to the most recent IRS data from 2008, the top one percent of income earners paid roughly $390 billion in income taxes on income of approximately $1.6 trillion, for an average effective tax rate of 23%. If the Bush tax cuts were repealed today, and the top tax rate went back up to the Clinton-era 39.6%, it would be reasonable to project that the average effective tax rate for the top income filers would only go up to where it was in 2000, 28%. Under those conditions, the government could only expect an additional $58 billion in tax revenue this year. That’s hardly more than a rounding error in a budget with a deficit of $1.6 trillion.
Even if President Obama argued for a return to the pre-Reagan top tax rate of 70% -- which when last seen in 1979 carried an effective tax rate of 37% according to the Tax Policy Center -- the government would realize just over $200 billion in additional revenue, or a little more than a tenth of this year’s deficit. Of course, none of this takes into account the consequences of tax hikes, reduced economic activity and correspondingly shrinking incomes for those in the top one percent of tax filers. The real take from increasing taxes at the top rates is likely to be much lower. Despite the rhetoric, President Obama simply can’t balance the budget on the backs of the rich.