Obama’s Class Envy Vs Economic Reality (2)

President Obama’s standard campaign speech, already repeated to several audiences includes a new attack on millionaires:

…we live in the real world, with real choices and real consequences. Right now, we’ve got significant deficits to close.  We’ve got serious investments to make to keep our economy growing.  And we can’t afford to keep spending more money on tax cuts for millionaires who don’t need them and didn’t even ask for them.

So in the President’s Orwellian vocabulary when a taxpayer keeps some of his own income it’s “spending money.”  But when government spends money it’s “investment.”

The perception Obama hopes to plant in the mind of the listener is that the government’s cash shortage is caused not by his massive spending surge, but by the tax rates that apply to million dollar incomes.

The chart tracks income tax revenue from taxpayers earning over $1 million from 2000 through 2009, the latest year for which IRS statistics are available.  It shows a dramatic revenue increase after tax rates were reduced in 2003.   As the red line shows, the average, effective tax rate paid by 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%.

A taxpayer’s “effective tax rate” is the amount of tax dollars paid divided by adjusted gross income.  Typically, high income taxpayers’ effective rate results from a blend of ordinary income taxed at 35% and capital gains and dividend income taxed at 15%.

The “Bush tax cuts” enacted in 2003 are still in effect.  In 2007 more tax revenue was collected from millionaires than any previous year, ever.

However, the recession was particularly harsh on millionaires.

  • In 2007  approximately 3 of every 1,000 taxpayers earned more than $1 million.
  • By 2009 the number had fallen by 40% to fewer than 2 of every 1,000 taxpayers earning over $1 million.

As a consequence the chart above shows that revenue from millionaires went down, even as their effective tax rate went back up, because the recession drove down income from capital gains and dividends.

If Obama’s only goal were to maximize revenue to the government he would enthusiastically support 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.  Throughout it’s history the capital gains taxed has consistently generated more revenue at lower rates and less revenue at higher rates.
  • Stock dividends are the investors’ share of corporate profits remaining after payment of corporate income tax, as high as 35%.  Thus the investor’s individual tax is a second levy on the same corporate profits.  When the individual tax rate on dividends was higher companies paid smaller dividends or no dividend at all because investors wanted to avoid double taxation and preferred profits to be deployed in ways that might enhance the market value of the stock.  After the tax rate on dividends was reduced investors looked for stocks that paid dividends and companies responded by paying more.  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.

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.


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8 Comments so far

  1. SenateStaff on April 20th, 2012

    More silliness and phony graphs. Corporations and the wealthy are hoarding Trillions. If they were going to “invest in jobs” they would have done it already.

    What a cruel joke, this supply side lie that poor, abused millionaires can’t afford to “invest” because 15% taxes is too high.

  2. JohnnyRed on April 21st, 2012

    OK Mr. Staff, are you saying the graphs are “phony” because millionaires didn’t really pay those amounts and the number of millionaires didn’t really go down?

  3. Andrea on April 21st, 2012

    This is another Bull S**t issue Obama is pushing because his record is horrible. They’ve already figured out that the Buffet rule would only cover a few days of Obama’s deficits.

    Class envy.

  4. Josh L on April 21st, 2012

    Voodoo economics never goes away. Still with the same old myth that the rich will pay more if we tax them less

  5. Anon on April 22nd, 2012

    Tax cuts for the wealthy don’t create jobs or trickle down. They become numbers in a bank account, not circulating in GDP. This economy needs middle class workers with money in their pockets to create demand

  6. [...] Obama’s Class Envy Vs Economic Reality (2) [...]

  7. Rebuke the Right on April 22nd, 2012

    President Obama wants the Buffet rule minimum 30% on millionaires

    Mitt Romney wants taxes on the rich to be even lower! He only pays 13% now. He supports the Republicans plan to cut the highest tax rate from 35 percent to 25 percent, thereby reducing the taxes of millionaires by an average of at least $150,000 a year.

    This should be a no-brainer. Rich Americans are taking home a larger percnetage total income than they have since the 1920s. Yet with the Bush tax cuts they pay the lowest taxes since the 20s.

    Unless the rich pay their fair share of taxes, the deficit those Republicans hate so much will only become worse.

    Our roads, bridges and public transportation systems are crumbling and obsolete. Our schools can’t afford textbooks or science labs, and classrooms are overcrowded. State colleges and universities are starved for funding.

    Surely the military can be smaller, and waste can be eliminated. But anyone who thinks we can balance the budget without additional revenue doesn’t know basic math.

    So how can extremists like this blogger possibly object to raising taxes on the wealthy? He’s probably a millionaire trying to hold on to a good deal.

  8. Ralphy on April 22nd, 2012

    I’m so sick of hearing about “fair share.” How much is their fair share? You liberals never answer that question. Fair is always more than they pay now. Top 10% already pay more than 90% of the taxes.

    Why don’t you ask the 49% who don’t pay any taxes at all to pay their fair share? You don’t ask because right now they get all the free stuff government hands out but don’t pay any of the bills. If you ask them to pay a little, maybe $100 a year your afraid they wont vote for you any more.

    Republicans are trying to grow the economy so there are more jobs for everyone. Democrats are trying to grow government so there will be more voters on the dole and more votes for Obama.

    I have just one word for you SenateStaff and Rebuke and Anon – GREECE!