Taking all of "the rich's" income isn't enough!

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.

Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.

But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

Comment: One wonders if he understands basic accounting


  1. Just for kicks, run some of the numbers. There are currently about 115 million households, most of which ought to be filing tax returns (even those who like me owe no taxes), but the WSJ suggests that 3.8 million is 7% of all tax returns--which would mean only about 56 million tax returns.

    If I'm calculating correctly, those earning more than $388k are actually 2-3% of the population, and those earning more than $200k are 5-6% of the population--remember about married couples filing together.

    This means that the amount of income allocated to the "rich" isn't nearly as grossly disparate as many analysts note--and hence what you can get out of "the rich" is far less than one would think.

  2. Banking Industry (financial trading) accounts for about 40% of GDP (and growing). Most countries Banking Industry pays about 1% tax over activity. A lot of internet business pays about 1% or less in a lot of countries, although they benefit from infrastructure. The average family pays about 40% in several taxes. Your whole perspective can't be right, Exxon profits alone account for 40M/year, Chevron 26M, Ford 20M....


Any anonymous comments with links will be rejected. Please do not comment off-topic