To Tax, or Not To Tax, That Is Not The Question

This is for everyone, including President Obama, stomping around like my two-year-old daughter whining about how we need to raise taxes on the “rich.” I can hear her now…”DA-DA! Higher Taxes! DA-DA, DA-DA! Higher Taxes, DA-DAAAAAAAAAAA HIGHER TAXXXXXXESSSSSSS!!!”

It equally applies to those acting like my four-year-old son stomping around and repeating, “Daddy, I don’t want higher taxes! Daddy, I don’t want higher taxes! DADDY…I SAAAAAID… I DON’T WANT HIGHER TAXES!!! I DON’T WANT HIGHERRRRRRRRRRRR TAXESSSSSSSSSSSSSSS!!!”

Can actual "millionaires and billionaires" like Jamie Dimon and Warren Buffet afford to pay higher taxes? Sure. Will these tax increases help reduce the deficit? Yes, but in the same way that chugging eleven Bud Light’s will make you less drunk than polishing off the entire twelve-pack.  

The 2010 deficit (i.e. the amount by which spending was greater than revenue) was $1.3 trillion dollars in cash terms. Said another way, in the time it took you to read that last sentence, the government spent $349,000, but only earned, from all sources, $211,000. The total income tax revenue (not including social security and Medicaid payroll taxes) was $902 billion. Therefore, even if we doubled everyone’s income taxes, we’d still be left with a $400 billion annual deficit.

In 2008 (the last year from which I could find this information, and a year in which the US Government took in $130 billion more in income taxes than in 2010) the top 5% of taxpayers paid $605 billion in taxes (59% of all tax revenues). The top 5% represented everyone with adjusted gross income of at least $159,619, and their effective tax rate was 21%. So even if President Obama were to lower his definition of “rich” to those making at least $159,000 (a huge U-turn that would be a major problem in 2012), he’d need to more than triple all of their taxes, to an effective rate of 67%, in order to balance the budget.

This analysis assumes constant income levels at the higher tax rates, which, of course, would never happen. Incomes would plunge if rates increased significantly, making the problem much, much worse. Even a plan as dramatic as a five percentage point increase in the effective tax rate for the top 5% (i.e. from 21% to 26%) would only generate $146 billion in additional revenue, which is enough to run the government for all of 14 days.

This proves just how much populist rhetoric was in play during the President’s recent budget speech in which he repeatedly mentioned “millionaires and billionaires.” To paraphrase the President speech – “we’ve got a major budget problem, but 98% of you don’t need to worry about it because we’ll just hit up the richest 2% for more revenue. Oh, and by the way, we’ll have our policy wonks look into our suffocating entitlements and defense budget to see if we can magically save money without any substantive reforms.”

Yet another example of our politicians prioritizing re-election and saying what the people want to hear at the expense of serious leadership. The government has a spending problem, not a revenue problem. Any budget proposal that does not aggressively address the costs of Medicare, Medicaid, Social Security and Defense (together 63% of the budget, and growing fast) is not serious.

We need courageous politicians to action serious and realistic budgets aimed at getting the deficit under control. However, we also need voters to accept the uncomfortable consequences of a serious budget, knowing that if we continue to kick the can down the road, we face a certain and spectacular collapse.

Paul Ryan and the Republicans showed a modest amount of courage in their proposal - the President kicked the can…again.

Nothing Short of Pure Evil Genius

Wow. The Democrats political posturing during the last 12 hours of the budget/government shutdown debate is nothing short of pure evil genius.

After dragging their feet for over a year, most of that time with the votes required to pass whatever budget they wanted, the Democrats are all of a sudden extremely worried about passing the 2011 budget – and by 2011, I mean the 5 months that remain in governments fiscal 2011. It reminds me of when I dilly-dally in the mornings with three or four smashes of the snooze button, or perhaps a little too much Wow Wow Wubbzy with the kids, and end up arriving at the train station just in time to watch my train steam off into the distance without me. I always end up blaming that pesky school bus for actually stopping to pick up the children or that one light that I just missed because the elderly driver ahead of me has the gall to drive her 1982 Cadillac the speed limit and actually come to a complete stop at stop signs. The bus and the elderly driver are annoying, but they are not the primary reasons I missed my train – I should have left the house 5 minutes earlier…

The Republicans and their proposed budget cuts are the Democrats’ school bus and elderly driver – a convenient excuse to mask their procrastination and ineptitude.

The evil genius comes from injecting the “women’s health” issues (i.e. abortion) into the budget/spending debate. If a government shutdown occurs and the Democrats can convincingly claim that the Republicans put 800,000 government workers and their families out of work because they want to cut funding for “women’s health” (whether true or not), the Democrats will come out of this shutdown smelling of roses and in a great position leading into the 2012 elections. Genius – pure, evil genius.

As for the Republicans, we have no idea how accurate Senate Majority Leader Reid’s statements are regarding the “women’s health” issues, but if they are even marginally true, and do in fact cause a government shutdown, the Republicans will have squandered a huge opportunity to kick start the spending cuts and will all but stop the positive momentum generated by their surprisingly well received 2012 budget proposal.

I think the Democrats have successfully called the Republicans bluff, and if the Republicans are smart, they will fold the current hand, take their profits so far ($40B in spending cuts that have been agreed), and save their chips for the next big hand (the 2012 budget).