Millionaire Tax: Obama Stirs Emotion, Ignores History

In his speech and in the “plan” he sent Congress President Obama sought to improve his reelection chances by stimulating the base human emotions of envy and resentment when he demanded that Congress enact punitive tax hikes on Americans with million dollar incomes.

Encouraging voters to blame their anxieties, fears and financial stress on the rich, or “millionaires and billionaires” is one of progressive movement’s oldest and crudest campaign themes.

Obama can probably count on more enthusiasm from his emotion-driven base if he succeeds with his millionaire tax increases.  But a review of history does not lead to the conclusion that government would collect more tax revenue or that non-millionaires who need jobs would be better off.  In fact, the opposite is more likely.

The chart above tracks tax revenue from millionaires and billionaires, showing a dramatic increase after their tax rates went down in 2003.   As the red line shows, the average, effective tax rate paid by all millionaires went down because the Bush tax cuts of 2003:

  • lowered the top tax bracket rate for “ordinary income” (salaries and business profits) from 39.6% to 35%
  • Lowered the top rate for capital gains from 20% to 15%
  • Lowered the top rate for stock dividends from 39.6 to 15%.

But the rest of the story, as the chart shows, is that the government collected more, not less tax revenue from taxpayers with million-dollar-plus incomes.

The “Bush tax cuts” were enacted in 2003 and are still in effect.  Revenue from millionaires grew an astounding 128% from 2002 to 2007.  In 2007 more tax revenue was collected from millionaires than ever before.

Then the recession hit and from 2007 to 2009 the number of taxpayers with incomes over $1 million dropped by 40%.   Revenue from millionaires fell by 43% but was still more than had been collected in 2002, the year before the current tax rates were enacted.

So what do Obama and his progressive friends want?  It would seem that if their only goal were to maximize revenue to the government to pay for all their various “programs” they would cheer for the current tax rates as – to use one of their favorite words for government policy – “smart” because:

  • The capital gains tax is voluntary.  It comes due only when an asset that has appreciated in value is sold.  Obviously, people are more likely to sell when the tax is lower.
  • Stock dividends are the investors’ share of corporate profits remaining after payment of corporate income tax which is usually 35%.  The investor’s individual tax is in addition to the 35%.  When the individual tax rate on dividends was higher companies paid smaller dividends or no dividend at all because investors wanted to avoid taxation and preferred that profits to be deployed in ways that might enhance the market value of the stock.  After the individual rate was reduced investors wanted stocks that paid dividends and companies responded by paying more to attract those investors.  Thus, the government is now collecting taxes on dividend income that did not exist when tax rates were higher and would disappear if the rates went back up.

In addition to to generating more revenue to the government, lower tax rates on dividends and capital gains also benefit the economy in general and those who seek jobs in particular:

  • When people sell an asset they look for new investments for the funds they receive, including business start-ups and business expansions that generate jobs.  If the capital gains tax rate is higher they are less likely to sell and those new start-ups are less likely to come into existence.
  • When investors receive dividends they seek new investment opportunities for those funds, including job creating business start-ups and expansions.

A taxpayer’s “effective tax rate” is the amount of tax dollars paid divided by adjusted gross income.  A high income taxpayer’s effective rate is a blend of 35% on ordinary income and 15% on capital gains and dividends.

By the way, taxpayers in all brackets pay lower rates on capital gains and dividends than they do on ordinary income.  In fact capital gains are tax free for taxpayers whose ordinary income rate is 15%, which would include most families who earn less than about $80,000, and some who earn even more.

Finally, the chart below tracks jobs and millionaire tax rates.  In 2007 there were more jobs than ever before at the same time millionaire tax rates reached their lowest.

If the most likely results of tax rate increases on “millionaires and billionaires” will be less revenue and fewer jobs then why would Obama keep campaigning for such increases? We can only assume his pollsters tell him he will win more votes by appealing to envy and resentment than by revealing the truth.

1 Comment so far

  1. Mineral make up on September 29th, 2011

    I dont know what to say. This blog is fantastic. Thats not really a really huge statement, but its all I could come up with after reading this. You know so much about this subject. So much so that you made me want to learn more about it. Your blog is my stepping stone, my friend. Thanks for the heads up on this subject.