From a distributional point of view, I have nothing against taxing the rich. Further, while it true fact that taxes tend to shrink the tax base (the only question is how much), let's ignore the Laffer-curve controversy. Let us instead accept the left's own calculations about tax revenue.
The centerpiece of President Obama's plan is to raise taxes on the rich (households making $250.000 or more). There is no doubt that the rich have become richer over the last few decades, and hence could afford this tax increase. If taxing them would solve the deficit crisis, I would support it in a heartbeat.
The only problem with this "solution" is that it is dishonest. President Obama likes to give the impression that his plan to tax the rich can significantly reduce the deficit, a claim which is false and which Obama knows is false.
Everybody knows that the rich have a lot of money, so it may appear reasonable to non-economists that taking some this wealth can fill the hole in the budget. What the public doesn't know, and what President Obama will not tell them, is that there are just too few rich people in America for this plan to work.
According to the Congressional Budget Office, over the next 10 years the Obama budget will produce a deficit of $10.900 billion, or 5.3% of GDP on average.
According to the left's own calculations and as reported by the New York Times, Obama's plan to raise taxes on the rich will generate $700 billion in additional revenue over the next decade, or just a pathetic 0.3% of GDP.
In other words, the plan to raise taxes on the rich will only cover one out of fifteen dollars of deficit spending. Where is President Obama going to get the other fourteen out of fifteen?
To the $10.9 trillion in deficits we need to add the unfunded liabilities of Medicare and Social Security. According to the Trustees of these programs, the unfounded liabilities are a staggering $52 trillion.
Again, any honest economist who knows the facts can tell you that a measly 70 billion in revenue per year from the rich will not come close to cover Americas fiscal hole of at least 63000 billion dollars.
Sometimes you hear from the left that repealing the Bush tax cuts will raise 3.7 trillion over the next 10 years. That certainly sounds better! What is the difference between this figure and the 0.7 trillion figure I reported for the rich?
The answer is that the 3.7 trillion figure includes the Bush tax cuts for the middle class, which amount to 3 trillion over the next decade. The key to remember is that the Bush tax cuts mainly went to households making less than $250.000. Obama has no plan to repeal that part of the Bush tax cuts. The Democrats and their allies in the media who cite the 3.7 trillion figure are playing bait and switch and trying to confuse the public. I saw this trick used recently by John Stewart to deceive his economically unsophisticated audience.
A graph with the next ten years of deficits with and without the tax hike for the rich:
But what if we taxed the rich even more? Didn't Warren Buffett promise taxing the wealth of billionaire's like him could solve the problem or something?
Forbes Magazine lists all American billionaires. Going by their 2010 numbers, American billionaires have around 800 billion in net worth.
Even if we could take confiscate all their assets without any risk to the economy, this one-time solution would just pay for around six months of the 2011 deficit Obama is running.
By opposing the tax increase for the rich based on the argument that it would hurt growth instead of pointing out how little revenue it generates, the Republican party has given President Obama a gift. The Democrats give voters the impression that the only obstacle in the way of fiscal balance are the Republican's, their rich friends and their supply-side ideology. This strategy works, because the public is as economists say "fiscally ignorant". Ordinary people simply don't know the relative magnitudes of the deficit, they only know the rich have lots of money.
The media meanwhile has only a selective interests in educating the American public. When miss-perceptions help the left the media suddenly loses interest in their duty to inform the policy debate.
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