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Tuesday, October 14, 2008

Obama's Real Tax Plan Is Bogus

WSJ covers it. Now ask yourself how we can possibly do this with the retirement draw down on the federal budget coming up and the federal deficit zooming up like it already is:
The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation's Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

The total annual expenditures on refundable "tax credits" would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as "tax credits," the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.

The political left defends "refundability" on grounds that these payments help to offset the payroll tax. And that was at least plausible when the only major refundable credit was the earned-income tax credit. Taken together, however, these tax credit payments would exceed payroll levies for most low-income workers.
We've got tough choices to make and we are going to have to make them, but this particular choice isn't available in the list of possible options.

To understand how difficult it would be to pay for this, consider the following household income split (the data here is derived from the 2007 American Community Survey, and the table is available here):
No of Households Low Income High Income % of All Households Cum % Of All
112,377,977 0 1,000,000,000,000 100.00% 100.0%
8,230,936 0 9,999 7.32% 7.3%
6,338,493 10,000 14,999 5.64% 13.0%
6,065,953 15,000 19,999 5.40% 18.4%
6,288,811 20,000 24,999 5.60% 24.0%
5,936,467 25,000 29,999 5.28% 29.2%
6,136,885 30,000 34,999 5.46% 34.7%
5,642,891 35,000 39,999 5.02% 39.7%
5,671,453 40,000 44,999 5.05% 44.8%
4,991,402 45,000 49,999 4.44% 49.2%
9,424,222 50,000 59,999 8.39% 57.6%
11,863,970 60,000 74,999 10.56% 68.2%
13,676,398 75,000 99,999 12.17% 80.3%
8,489,074 100000 124,999 7.55% 87.9%
4,663,383 125,000 149,999 4.15% 92.0%
4,508,193 150,000 199,999 4.01% 96.0%
4,449,446 200,000 1,000,000,000,000 3.96% 100.0%

Keep in mind that incomes will be trending lower for the next couple of years, due to that little thingamabobble I call a "recession". Median income is still around $50,000. American households earning less than $30,000 are about 29% of the total. Your subsidies and credits should be mostly aimed at this group. If you want to give 95% of Americans a tax break, that means you are going to be taxing the remaining 5% monumentally more, beginning with household incomes at around $175,000.

For all intents and purposes, raising taxes that much on this group is impossible. Let's round that group to about 4.5 million, and say that's equivalent to 9 million individuals. That 9 million individuals would collectively have to pay over 500 billion more in taxes to pay for the refundable portion to the lower brackets. A billion has 3 more zeros than a million, so (500 billion/9 million = 500,000,000,000/9,000,000 = $55,556 per such taxpayer. Needless to say, you are not going to be taxing a person making $175,000 an ADDITIONAL $55,000 if you expect this person to keep working, much less tax a household making $200,000 an ADDITIONAL $110,000, so you are going to have to shift most of that onto much higher income persons.

How many such persons are there? The best source for this is the IRS data on tax returns, which can be found here. The last year of data available was 2006, and in 2006, only 0.7% of households reported AGI of $500,000 or more, and that bracket and up paid 35.9% of total income taxes. 2.9% of all returns reported AGI of $200,000 or more, and that bracket and up paid 53.9% of all income taxes. There were less than a million returns in the $500,000 or more category, and less than 140,000 returns in the $2,000,000 and or more category.

There were 354,093 returns in the $1,000,000 and up category. Let's suppose I want those 354,093 return filers to pay for 400 billion of those income tax refundable credits
(IRS pays person whether they paid taxes or not), which leaves about 100 billion for those between $500,000 and $1,000,000, and another 100 billion for those making over $200,000 but less than $500,000. .

The liability per return is almost $1,130,000, or 1.13 million per return. Needless to say some of that will be shifted to the 140,000 returns in the $2,000,000 or more category, but still, it's not doable. At those rates all but the extremely rich will be forced to shift income to shelter it; you can never collect this from taxpayers.

In short, this guy is numerically illiterate or deliberately dishonest. I happen to believe that he is numerically illiterate.

Don't forget that the real plan to save Social Security entails removing all income limits on Social Security contributions, which adds another 3.65% to the income tax for higher wage earners anyway. There is also the alternative minimum tax, which removes the tax exclusions for higher income persons to force their real minimum tax brackets sharply higher. Somewhere around 50-60% of marginal tax causes all sorts of interesting things to happen, and at that point your net taxes collected start going down.

One thing that high income Americans can do, and do do, is invest in no AMT municipal bonds. The tax savings are so high that they really don't care if they lose a percentage of their capital, although they certainly don't want to lose it.

You'd collect more income tax from the top group, and get better investments, by imposing a flat tax of 25% on this group. Seriously!!!

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