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Wednesday, April 25, 2012

Hubbard: Obama's Budget Means 11% Tax Increase on Those Earning < $200,000

Wall Street Journal op-ed, Obama's Budget Means a Tax Increase on Everyone, by Glenn Hubbard (Dean, Columbia Business School):

Maintaining the president's higher spending levels will require raising taxes for all Americans, including an 11% increase on those earning less than $200,000.

President Obama's budget proposes to continue elevated levels of federal spending relative to GDP. So how does the president propose to pay for this?

We are told that the answer is to raise taxes on upper-income workers. Let's put aside that tax-reform advocates, including the Bowles-Simpson Deficit Commission appointed by President Obama, argue for reducing marginal tax rates, making up lost revenue by broadening the tax base. Let's focus on the arithmetic of the president's tax strategy—the Buffett Rule, plus tax increases on dividends and capital gains, plus raising the top income-tax rate to its pre-2001 level.

The Buffett Rule—designed to impose a minimum effective tax rate of up to 30% on taxpayers with annual income exceeding $1 million—would not affect many upper-income taxpayers who already pay a marginal tax rate of 35%. In its official revenue estimate, the Joint Committee on Taxation says the tax would raise about $47 billion over 10 years, or less than $5 billion per year. Maintaining the higher spending suggested by the president totals about $500 billion per year.

Now we come to the higher taxes on dividends and capital gains. The president proposes to increase the tax rate on capital gains by one-third, to 20% from 15%. He proposes to raise dividend taxes to 39.6% from 15%. The Treasury's revenue estimate from taxes on dividends and capital gains is about $242 billion over 10 years.

Next, the president wants to restore the pre-2001 tax rates for high-income individuals, including increasing the top marginal income-tax rate to 39.6% from 35%. Treasury expects this tax increase to net $442 billion over 10 years.

The president's budget also calls for phasing out exemptions and lower-bracket tax rates for higher-income taxpayers. This will raise marginal tax rates for those individuals even higher than the 39.6% described earlier. These two provisions will net $165 billion over the next decade, or some $16.5 billion a year.

Finally, the president would limit certain tax deductions for individuals with incomes over $200,000. This would net $584 billion over the next decade.

Now let's review the math. All these tax increases on upper-income taxpayers are projected to raise $148 billion per year. Viewed next to proposed additional spending of roughly $500 billion per year, or this year's federal budget deficit of $1.3 trillion, the president's budget faces an arithmetic challenge.

How big is that challenge? Maintaining the president's higher spending will require raising taxes for all Americans. Assuming the president favors raising marginal tax rates over broadening the tax base (consistent with his failure to consider the tax proposals from Bowles-Simpson), an across-the-board tax increase of 11% for taxpayers with incomes under $200,000 would be required to raise the money the president proposes to spend.

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Comments

Maybe it's because I'm a Maker and not a Taker, but where is all this money going? I'd think with trillions being spent I'd see, I dunno, a repaved street. Or a check for a million dollars in my pocket. Something.

Posted by: jim | Apr 25, 2012 1:03:41 PM

Obama's version of Bush, Srs' pledge: "Know new taxes!"

Posted by: tripleforte | Apr 25, 2012 1:14:35 PM

The government wants to take an additional $1k+ per month from my household budget?

Ok. We will survive. But that wipes out almost all discretionary spending - mine and my wife's sports/hobbies, the kids extracurriculars, dining out, probably the end of the big yearly vacation, trips to the local amusement park, etc.

It will be bare bones living. Which stinks for us, but will be worse for those who profit from our pleasures.

I pity anyone who works in a non-essential type business or industry.

Posted by: ThomasD | Apr 25, 2012 1:19:48 PM

Ah, but he doesn't intend to raise as much revenue as he spends. He plans to continue to spend many more times as much as he takes in. Then when the bill comes due 5 or 10 years from now, he won't be POTUS any more. It won't be his problem. It will be yours and mine, and that of our children and grandchildren. He doesn't care, because he doesn't need to care.

Posted by: Robert Hanson | Apr 25, 2012 1:36:00 PM

At the rate they're going telling deadbeats they're entitled to other people's money the evil One Percenters will be anyone dumb enough to have any job at all.

Posted by: Emerson | Apr 25, 2012 3:11:10 PM

So cut the spending. Claw back the good old boy loans to Obama's bundlers and prosecute them and the responsible cabinet officials for fraud.

Posted by: DonM | Apr 25, 2012 4:25:19 PM

Right wing election year lies. Even if it is true, it is only a way-overdue repeal,of Bush's tax cuts for the rich.

Posted by: Vinny B. | Apr 25, 2012 8:44:19 PM