UPDATE: Administration official David Pluffe, appearing on Fox News Sunday announced that this week the President would present “a plan” for deficit reduction that would include raising the top two income tax brackets to the pre-Bush rates.
Congress and the President are beginning what will become an historic two-year debate over the cost and appropriate role of government. Spending has increased so much in the past two years that in 2011 the government will have to borrow 43¢ of every dollar it spends, compared to 15¢ in 2008 and 6¢ in 2007. But Democrats are unwilling to cut anything.
An emerging Democrat-media budget deception is about “tax breaks for the rich,” enacted under President Bush in 2003. Even before he was elected President Obama announced his intention to raise the top two bracket rates to from 33% and 35% to the pre-Bush rates of 35% and 39.6%. But so far, he has been unable to convince Congress to enact the increases.
The Democratic-Media talking point we’ve heard this week is that if “the wealthy paid their fair share”- meaning the pre-Bush rates - “we could afford” Obama’s massive increase in the cost of government.
So, we ran a “what-if.” As the chart below shows increasing tax rates on the rich to the pre-Bush rates, or even doubling them to 66% and 70% would not make a significant dent in the astronomical deficit.
The most recent data available from the IRS is from 2008. The green column in the middle shows that $36 billion in additional revenue would be collected if the top two brackets had been raised to the pre-Bush rates. The green column on the right shows how much additional revenue be collected if the top two brackets were doubled to 66% and 70%.
Obviously, these tax rate increases would not have raised nearly enough revenue to offset the enormous deficit the Obama Administration is planning for 2011. But even the small increases in revenue shown in the chart are too optimistic because they don’t take into account the historically demonstrated fact that as tax bracket rates go up taxable income goes down.
High income people have the ability to defer part of their income to future years or to hire lawyers and accounts to devise exotic ways to shelter income, or to simply quit working before the end of the year if they decide the tax burden on additional income will be too great. Thus, there would be less taxable income if the rates were higher and the additional revenue amounts shown in the chart are more than would actually be collected.
As the chart below shows tax revenue was falling before the Bush tax cuts of 2003 and the government collected more tax revenue from the rich after the tax rates were reduced.
Cost born by the middle class
Not only would pre-Bush tax rates fail to raise nearly enough revenue to balance the budget, there would be a cost to the economy and to the middle class in the form of fewer business start-ups and expansions and fewer new jobs created. Half the taxpayers in the upper brackets are small business owners. Most small business expansion and job creation is funded from after tax profits. Higher tax rates mean less in after tax profits and thus, fewer new jobs.