A "Blame the Wealthy" Budget Speech

According to President Obama, the Bush tax cuts, in particular the ones that went to the the wealthiest 2

percent of taxpayers, are to blame for the budget mess that we're in.  This statement comes as no surprise; in 2009, President Obama threatened to raise taxes on the wealthiest 2 percent by allowing their lower tax rates passed by President Bush to expire.  Then, in an about-face, in December of last year he agreed to extend all the Bush tax cuts for all taxpayers for 2011 and 2012.  Fast forward to yesterday, where in an attempt to crack down on those pesky households earning $250,000 or more, the President proposed to raise taxes in the 2012 budget for the top 2 percent.    Why?  Because, as he said yesterday, “…in the last decade, the average income of the bottom 90 percent of all working Americans actually declined.  Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each.” 

The way the wealthy are portrayed, one would think that somehow they are paying zero federal income taxes and taking unfair advantage of every government welfare program available. 

But let's get some perspective on those top earners that politicians love to hate. What was not mentioned was the fact that very wealthy, the top 1 percent, also pay the lion's share of federal income taxes.  According to the Tax Foundation, the tax burden of the rich has been steadily growing. In 1987, the top 1 percent paid nearly 25 percent of the federal income tax burden; now they pay nearly 40 percent.   Thus incomes for the wealthy have grown, but so has their share of federal income ta

xes.  But suppose those earning $250,000 or more were taxed at a marginal rate of say, 80 percent.  This would still be not be enough to close the gap on the federal government's runaway spending.  (See more on this in the NCPA publication, “The Limit of Tax Revenues.”)

Furthermore, the wealthy have been sufficiently warned, so they will simply avoid paying higher taxes.  How?  Since they hold a large portion of investment income, they can sell assets now and pay a lower tax rate in anticipation of a 2012 tax hike.  Considering the upcoming Medicare tax they will pay on unearned income under Obama's health reform, this seems like a rational choice. (For more on future Medicare taxes on the wealthy, see the NCPA publication, “New Taxes on the Wealthy are Bad News for Everyone.”)

The problem in the budget is not that people pay too little in taxes, but that government spends too much.  Dr. Phil couldn't have said it better:

If it's money troubles you're encountering, having someone pay all your bills and give you some extra spending cash wouldn't fix things. You need to make bigger changes that prevent the same problems from recurring. (from Re-engineer Your Life, www.drphil.com)

This advice meant for households could easily apply to the federal budget deficit.  But chances are, amid the political posturing and finger-pointing, nobody will be paying attention.

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Comments (10)

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  1. Devon Herrick says:

    Cato’s Richard Rahn has an article in the Washington Times that explains how the budget problem is actually because the rich bear too much of the tax burden. Here is what he has to say about it:

    This has resulted in a situation in which a relatively small minority of taxpayers pay the bulk of the taxes, while most American pay little or no income tax. This is causing an increasing disconnect between benefits from government and what most citizens pay for. One result is a greater polarization in the political realm where a majority of citizens increasingly demand more government benefits for which they want others to pay.

    Article here: http://www.washingtontimes.com/news/2011/apr/11/tax-inequity/

  2. Ian Kodanik says:

    Too true! Even if you really soaked the rich, it wouldn’t be nearly enough. But that’s not a good soundbite.

  3. Eric says:

    However, Obama’s plan is a combination of tax increases and spending cuts (and more spending cuts than tax increases). This would be returning the level of taxation to that under the Clinton Administration, when we had a record surplus. Were the rich suffering terribly then? I think not. But why let reality get in the way of a convenient narrative?

  4. Tom says:

    The government absolutely needs to rein in its spending.

    Warren Buffet would throw a wrench in your machine though.

  5. Joe Barnett says:

    It’s important to keep in mind that the president’s oft-repeated claim, ”…in the last decade, the average income of the bottom 90 percent of all working Americans actually declined.” does NOT mean that “the income of 90 percent declined.” Most Americans are better off than they were 10 years ago. What has happened is that the percentage of income (including the real overall increases that have occurred) going to each income decile (10 percent) has changed. Most of us are not even in the same decile we were 10 years ago. See Steve Rose’s article.

  6. Pam Villarreal says:

    Eric, many attribute the Clinton-era budget surplus to fiscal restraint, not higher taxes (including the Office of Management and Budget). But if we are going to have Clinton-era tax rates, why not have Clinton-era spending restraint as well? The Administration’s budget proposal includes some spending cuts, but not nearly enough.

  7. Marvin says:

    Two words: Atlas Shrugged.

  8. Amanda says:

    Great analysis.

  9. jimbo says:

    This blog loses all credibility in the first sentence. Obama said no such thing.

    Joe: None of your statistical mumbo-jumbo changes the truth of what Obama said about 90%. The average income for the group has dropped. Is that typical over a 10-year period?

  10. Brian Williams. says:

    In Washington, a tax cut costs money (as if the government funded tax cuts like they pay for Alaskan bridges).

    In reality, taxpayers can’t afford the government we currently have.