Peter Ferrara: What If Revenue From The Rich Dries Up?

ACRU General Counsel Peter Ferrara wrote this column appearing August 2, 2010 on

President Obama says his sweeping, across-the-board increases for every major federal tax rate starting next year are necessary for “the rich” to pay their fair share. “The rich” are defined as those making more than $250,000 per year.

Those increases include a close-to-60% increase in the capital gains tax rate, counting the new 3.8% tax on investment income in ObamaCare. The tax rate on dividends would soar by nearly three times.

The top two personal income-tax rates would effectively rise nearly 20%, counting the phase-down of deductions at those income levels.

Under ObamaCare, the Medicare payroll tax rate goes up 31% for higher-income earners. The president would also restore the death tax rate at 45%.

But even before these sweeping tax hikes take effect, official IRS data showed that the top 1% of income earners pay 40.4% of all federal income taxes, almost twice their share of adjusted gross income.

The top 5% pay 60.6% of federal income taxes, while earning 37% of adjusted gross income. The top 10% pay 71.2% of income taxes, while earning 48% of adjusted gross income.

Meanwhile, the bottom 50% of income earners pay only 2.9% of federal income taxes. Indeed, the bottom 95% of income earners pay 39.4% of all federal income taxes. That means the top 1% of income earners pay more federal income taxes than the bottom 95%!

Which should lead you to ask regarding “the rich,” what would be their fair share?

The above data are all correctly reported by the Tax Foundation, and are available on its Web site. The data are for tax year 2007.

Reverse Wealth Effect

The compiled 2008 data, which will be publicly available shortly, will show sharp declines in taxes paid by the rich due to the financial crisis. But the 2007 data show the results of the years of tax policy that Democrat socialists are so up in arms about.

Aside from the issue of our national tax system following the moral code of pirates, all of this presents practical economic problems that have not been fully appreciated.

First, these tax increases are highly unlikely to raise the revenue projected by the static budget analysis.

How much of the tax burden can these upper-income earners be expected to sit still and bear?

For capital gains alone, every tax increase over the last 40 years has produced less revenue rather than more. Due to the counterproductive economic effects of all these rate increases, revenues overall are likely to fall substantially short of budget projections.

Even with the above tax increases, CBO projects that by 2012 the national debt will have doubled in only four years, to $11.5 trillion. By 2020, it will have almost quadrupled since 2008 to $20.3 trillion. By the end of this year, CBO projects the national debt will reach 62% of GDP, higher than at any time in our history except for World War II and shortly thereafter.

Indeed, as Brian Riedl of the Heritage Foundation reports, under his proposed budget, “President Obama would run up more debt over his eight years than all other Presidents in American history — from George Washington to George Bush — combined.”

But since all the tax increases on “the rich” won’t raise nearly the revenue projected, federal deficits and debt will be even higher than already projected. The Obama budget already projects that net interest spending will soar to $840 billion by 2020, more than four times current levels.

Less revenue than now expected means this interest spending is also going higher, which translates into even more deficits and debt. If interest rates rise higher than the modest levels the Obama budget now projects, all of this tailspins into an even worse downward spiral.

Moreover, if we try to shift even more of our national tax burden onto just a few taxpayers at the top, many will stop investing in America, and producing the income that flows from that investment, and some will leave altogether and take their high incomes with them. Such capital flight will mean even fewer jobs and lower wages for working people.

Hitting The Poor

Finally, if President Obama is right that a big tax increase is necessary to close long-term budget deficits, as he suggested in appointing his Deficit Commission, then with the top 1% already paying more in income taxes than the bottom 95%, that tax increase is headed squarely for precisely that bottom 95%, as we are unlikely to get more revenues from the top income earners than we are already seeking.

That would violate the central pledge that got Obama elected in 2008.