TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, February 26, 2009

WSJ: The 2% Illusion

Editorial in today's Wall Street Journal: The 2% Illusion: Take Everything They Earn, and It Still Won't be Enough:

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% 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. 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 Mr. Obama's new spending ambitions.

See also Bloomberg: Obama's Proposed Tax Increase Would Hit Highest Earners Hardest, by Ryan Donmoyer & Aliza Marcus:

President Barack Obama is proposing the first tax increase on high-income earners in 16 years to help pay for sweeping health-care reforms, asking the U.S. Congress to cap the tax deductions for affluent Americans.

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He'll get the rest (the rest of the money and the rest of us) with his Carbon Tax?

Posted by: DB | Feb 26, 2009 6:39:51 AM

And even with the 250K ceiling, there will have to be exceptions for hollywood people, plaintiff's attorneys, union officers and the relatives of members of Congress.

Posted by: Marty | Feb 26, 2009 6:59:47 AM

It's worse than the WSJ admits. Rich people don't print their own money. Every penny in tax increase they see, they pass along to the rest of us, plus a small commission to pay for the cost of collecting it.

Hundreds of years ago governments hired private tax collectors to go out and beat the taxes out of the peasants. Not surprisingly tax collectors were hated and feared. They were also expensive, taking up to half the money they collected for themselves. Then governments discovered that a progresive tax rate does the same thing and cost much less to administer. Instead of hiring thugs to collect taxes now they have the taxpayers themwselves collect it, at much lower cost and greater efficiency. And the beauty of the scam is that the government gets to blame "the rich" for being greedy and not admit their own part in the bilking.

Posted by: Orion | Feb 26, 2009 7:11:05 AM

Well, that's right. The rest of us will suffer 'death by a thousand cuts': indirect taxes in the form of higher prices on goods (because companies are taxed into near oblivion) or hidden taxes on gasoline, hotel and airline tickets, automobile tires, medicine, etc. No, Obama won't need to tax everyone directly through the IRS, but every single American will see these indirect taxes show up somewhere in their lives...

Posted by: ProfShade | Feb 26, 2009 7:24:06 AM

Cavuto has been hammering liberal guests on his show for months (years?) now and never ever gets a response that doesn't just dodge this rather simple point.

Posted by: Boyd | Feb 26, 2009 7:28:40 AM

Disclaimer: I think it is stupid to increase taxation when the goal is to improve the fortunes of the private sector economy.

However, the WSJ article states that:

$522 = 62% of FIT receipts
and in the very next sentence that:
$408 = 39.9% of income tax revenues

The way the article is worded, FIT receipts and income tax revenues seem to refer to the same thing.

If this is the case, then the math above is clearly incorrect. If it is not the case, then this part of the article is misleading (not that I can think of any reason why the authors would want to mislead here...just does not make any sense).

Either way, it is difficult to figure out what the numbers are supposed to mean when the math is so wrong or so poorly presented.

Posted by: Troll Feeder | Feb 26, 2009 7:30:26 AM

Paul: Maybe you could comment on the actual proposal that the WSJ and other media outlets are talking about. One way of looking at both proposals that have so far been raised is that they are simply an early reinstatement of pre-2003 tax levels on earners above $250,000 -- both the 39.6% upper bracket and the phaseout of itemized deductions. The WSJ and others have been particularly weak in describing the latter -- most articles I've seen seem to imply that this is some kind of new higher tax.

Weren't both of these provisions due to return in 2011 in any event?

Posted by: WhatAmIMissing? | Feb 26, 2009 8:58:17 AM

oCome 2010 0r 2011 (this administration can't seem to keep it's dates straight) not only will I cut back my hours to make just less than $250k, the community will have that much less medical care.

Brilliant strategy you got going there O.

Dr. Kranky

Posted by: Dr. Krnaky | Feb 26, 2009 10:03:13 AM

It's even more basic than that. These folks are not going to pay much more than they already do; that's why God gave us tax attorneys and CPA's.

Posted by: RR Ryan | Feb 26, 2009 10:49:41 AM

No problem, Kranky. I'm sure we can get better and less cranky doctors for less from India !!

Posted by: jon | Feb 26, 2009 12:26:26 PM

Dr. Kranky - my husband said the same thing this morning....and I know he's not alone in the sentiment....boy, it's gonna get ugly out there!

Posted by: Doc's Wife | Feb 26, 2009 2:16:31 PM

How racist of anyone to oppose Obaba's tax increases.
Don't they know that paying taxes is patriotic?

Posted by: borris | Feb 26, 2009 3:41:09 PM

I don't care much for Obama's proposals, but he's basically going back to the Clinton era in tax policy, he's not even undoing the third year of Reagan let alone going back to the 1960s. He would need nominal rates of 50 or 70 percent to do that. Most of his health care and other proposals are similarly things that Clinton would have done or if he were more competent . . . or less politically convenient. His problem is that unlike Clinton, he's trying to do them with the economy collapsing around him. It's very courageous, all right; whether it makes sense is another matter.

Posted by: mike livingston | Feb 26, 2009 6:45:29 PM

You're all missing the point. These proposals will bring in far more money than the WSJ admits. The only thing the plan lacks is some way of inducing significant inflation, thus drawing more and more Americans into the ranks of the "rich." You know, kinda like the AMT.

Now, if only the president could find some way to bring about that inflation...

Posted by: MCL | Feb 26, 2009 8:50:41 PM

O has gotta go! Can't wait to vote again.

Posted by: MollyB | Feb 27, 2009 4:07:10 AM

There are some major errors in this editorial - they used the table for itemized returns instead of all returns:

Posted by: Jeremy Leipzig | Feb 27, 2009 8:15:29 AM