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Tax schemes and fiscal dreams

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Trying to fill the federal government’s gigantic budget hole with a 5.6 percent surtax on the tiny number of people with incomes greater than $1 million, as President Barack Obama proposes, is like trying to fill the Grand Canyon with a spoonful of dirt. It’s just a gesture that’s not serious.

Spending, not revenue, is the problem. Did you believe the federal government spent too little 10 years ago? I’ll bet not. Today the federal government spends twice as much — $1.8 trillion budget in 2001 and approximately $3.7 trillion this year. The national debt — the total amount of federal government debt outstanding — has grown from $5.7 trillion 10 years ago to $14.8 trillion (and growing) now.

For taxes to have kept pace with the growth in the federal government over the past 10 years, tax receipts would have had to double. Do you want federal spending and tax receipts to double every 10 years?

Yet the president has announced his intention to take more income from “the wealthy” even as half the nation’s households pay no federal income tax and studies show government could seize every penny earned by Obama’s tax targets with barely any impact on budget deficits or the debt.

Indeed, economist Walter E. Williams of George Mason University ran census numbers related to income. He said if the federal government were to take every penny of income above $250,000 from the 2 percent of households that earn more than that amount, the total would be $1.4 trillion.

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If the federal government were to take every penny of net worth from the nation’s billionaires — including Warren Buffett — that would total another $1.3 trillion. Combine those two amounts and that totals $2.7 trillion, approximately $1 trillion less than needed to cover this year’s federal budget.

It would have no significant impact because only three-tenths of 1 percent of the people who pay taxes in this country earn $1 million a year, according to the White House’s own estimates.

While Obama and others on the left try to convince themselves that raising taxes on a tiny fraction of taxpayers would help the economy and significantly shrink government deficits and debts, various groups and politicians on the right are trying to convince themselves that tax reform is the answer to our problems.

They’re floating several proposals: flat tax, Fair Tax, value-added tax, national sales tax, etc. Republican presidential contender Herman Cain, who has vaulted to the lead in some recent polls, has his “9-9-9” plan:
9 percent personal income tax, 9 percent corporate tax, and 9 percent national sales tax.

Cain said his plan would be “revenue neutral,” meaning the federal government could expect to bring in as much tax revenue under his plan as under the current system. The other tax reforms also stress revenue neutrality.

But revenue neutrality and tax increases on a tiny fraction of taxpayers do nothing to address the core problem of spending.

With federal spending having doubled in 10 years, that works out to an average annual increase of more than 7 percent, at a time when the government’s Bureau of Labor Statistics reports annual inflation rates were below 1 percent in one year (2008), between 1 and 2 percent three times (2001, 2003, 2010), between 2 and 4 percent six times (2002, 2004, 2005, 2006, 2009), and above 4 percent only once (4.1 percent in 2007). We won’t know the 2011 inflation rate until the year is over, but it’s currently estimated at 3.8 percent, according to the BLS.

Until we have lawmakers and a president who actually cut spending — not just reducing rates of government growth — no amount of tax revenue will ever be enough, whether it comes from the current tax system or a reformed system with revenue neutrality.

Steve Stanek is a research fellow at the Heartland Institute in Chicago.

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