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.