Dems’ War On The 1% Wounds The Middle Class

Our previous article used recent data from the IRS to debunk claims by Democrat party candidates that the wealthy don’t pay their “fair share” of income tax.  We also exposed some of the harm done to the middle class when Democrats encourage and nurture rage and resentment toward high income taxpayers, most of whom are small and medium sized businesses.

Several tweets and emails complained that we were ignoring the alleged benefit of increasing tax rates on the high income “one percent” – making them pay more to reduce the deficit and fund for government programs.

Well, thanks to the same IRS data we are now able to determine just how much extra tax revenue resulted from the most recent tax increase on the highest income

Try to remember all the way back to the end of 2012.  President Obama had just won reelection. He and Congressional Democrats had manufactured a crisis they called The Fiscal Cliff.  If new legislation were not enacted immediately there would be a tax rate increase on every taxpayer, from lowest income to highest.

After weeks of negotiation in Congress, Democrats got what they wanted, increases only in top bracket tax rates as shown in the table to the right.  The top tax bracket applies to income over $465,000.

When the tax increase agreement had been negotiated in Congress and was about to become law President Obama delivered a victory speech on New Years Eve 2012.  The transcript is still here on the White House web site.

Here’s an excerpt:

Little ObamaLast year in 2011, we started reducing the deficit through $1 trillion in spending cuts. Those have already taken place. The agreement being worked on right now will further reduce the deficit by asking the wealthiest…to pay higher taxes for the first time in two decades, so that would add additional hundreds of billions of dollars to deficit reduction. (emphasis added)

A White House web page, published January 2, 2013 says the agreement “cuts the deficit by $737 billion by asking the wealthiest to begin to pay their fair share.” 

So how did this work out?  Were there “additional hundreds of billions of dollars” from the one percent? 

It turns out the over-$500,000 income earners did pay $8.4 billion more in 2013 than 2012, reducing the government’s deficit by about 1%, from what would have been $687 billion down to $679 billion.  Obviously, a tiny fraction of what the President predicted.

But, there were fewer taxpayers earning over $500,000 and the share of tax revenue they provided declined slightly, from 36% to 35%.

Democrats either conceal or never learned the historical reality that higher tax rates are a disincentive, discouraging entrepreneurs and investors from taking the risks that are inherent in starting or expanding businesses and creating jobs.  Government doesn’t cover losses but if the investments, risk taking and hard work pay off the IRS participates in any profits or gains as if it were a partner.

As the table above shows, the largest increases were to capital gains tax rates.  A capital gain is the profit from selling a capital asset for more than it cost.  Capital assets include stocks, bonds, real estate and businesses.  The tax is due and payable when an asset is sold.

How did top bracket taxpayers respond to Obama’s punishing capital gains tax hikes? Remember, the gain is not “realized” and thus is not taxed until the asset is sold.

In 2012 they sold enough assets to generate $505.7 Billion in capital gains. 

In 2013 they sold enough assets to generate $336.6 billion in capital gains, a 33% reduction. 

Thus, there was no significant tax revenue increase from top bracket taxpayers, even though there was a sharp increase in top bracket tax rates.

The bottom line:

The 2013 tax hikes on “the wealthiest” produced the same results as previous attempts to victimize high income entrepreneurs and investors: 

  • The promised benefit, a flood of free money to the government, all on the backs of “the one percent” didn’t materialize.
  • The middle class suffered from lack of economic opportunity because high tax rates discourage and reduce entrepreneurial activity that creates jobs and economic opportunities.

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