Wednesday, November 21, 2012

Obama, the Fiscal Cliff and a 1966 Thunderbird

A friend on Facebook pointed out an article by Derek Thompson, a senior editor at The Atlantic. The article, titled Rich People Who Don't Understand Taxes Should Be Told So, went into great detail in explaining the distinction between marginal and total tax rates.
This quote in particular caught my eye, “According to the president's plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He's only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn't go up by $12,000. It would go up by $50. A steak dinner, not a small car.”
Now I take umbrage with the thought that my dollars “enjoy” having 15 to 20% of them whacked off the top before I get to spend them. But that is for another discussion.
What I’m writing about now is how the 5% increase is shown in his article to be so small as to not even matter. Why, it is only fifty dollars, just one less steak dinner! If you make two hundred and fifty thousand dollars a year fifty bucks is no big deal, why are you so upset about fifty dollars?
I thought this a fair question. So I did some research and some math and this is why we should be upset.

Per IRS and Census data:
There are 6 million people who make over $250K but less than $1 million.
There are 235,000 people who made more than $1 million but less than $10 million.
 Finally, there are only 8000 people who made more than $10 million.
I could find no figure showing what the highest personal income was.
Remember this whole plan is based on personal income, not net worth. George Soros is worth $19 billion, but earns about $30 million a year.
Starting with the bottom group in the $250K to $1 million income range; some just make over the 250K mark and some make 999K. To simplify, let’s divide it down the middle and say there are 6 million who make $500K in income a year.
Now the math part:
500K income minus the 250K already taxed equals 250K taxable at the new Obama rate of 5% which equals $12500 more taxes per person.
Then take the $12500 in new tax dollars and multiply times the six million people who fall into that new bracket and you get 75 billion dollars more coming into the Treasury.
Next is the 235,000 people who make between 1 and 10 Million dollars a year. So split the difference again: 5 million in income minus 250K equals 4.75 million dollars in taxable income times the 5% equals $237500 more in taxes per person. $237500 times 235,000 people equals 55.8 billon dollars more.
Now the last one is hard because I can't find the top end. The IRS says there are 8000 people in the USA who make more than $10 million but there is no way to tell what max is, so let’s go with 20 million as an average. That's a fair number since you have people like Will Smith who make $20 million a movie. So again $20 million minus the 250K equals $19,750,000 taxable income times the 5% equals $987,500 more in taxes. $987,500 times 8000 people equals $7.9 billion.
Okay, so the total tax receipts based on the Obama tax hike are 75 billion + 55.8 billion + 7.9 billion equals $139 billion. The total personal income of the USA is 12.9 Trillion dollars. It looks like Obama may be cutting just over 1% of the total personal income of the country off the top. That is much more than a steak dinner but not enough to make a difference towards our debt and deficit.
Of course the government spends $6.8 million dollars a minute, so 20,000 minutes or less than two weeks later it is all gone.
The big question is how do we fix whatever is wrong with the economy. Just how giving the government $139 billion more dollars will do that is a mystery. We will have 139 billion less to spend and if you pushed all the new money up against the $14 trillion in national debt it is a drop in the bucket. The Fed is printing $40 billion dollars a month out of thin air to cover the overhead. So taking three months of Monopoly money out of the pot will make no difference.
In the end I see that Obama’s tax plan will only be good for the first year, after that the tax receipts will probably go down. Since as it has been pointed out most of the 6 million people are small businesses that are taxed at the personal rate. This coming year if Obama gets his way and raises taxes they will incorporate and reduce their tax burden in the following year.
So why all the fuss about what, in government terms, is not a lot of money? In a word Politics, my friend, Politics. This issue in my opinion gives the President and the Democrats something, a cause, to use to drive over the cliff. Like Thelma and Louise they are headed to the cliff in their Thunderbird, smiles on their faces and an absolute certainty they have won. If they can take us over the fiscal cliff and blame the Republicans all the way down then they think they are winning the political game, we are just collateral damage in the process.

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