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A. Sinan Ünür
August 18, 2008
I watched the Saddleback Civil Forum on the Presidency with some curiosity. I must admit, I had heard of neither the Saddleback Church nor the apparently famous Pastor Rick Warren before watching this political Q&A session.
Senator Obama was first on the stage with Mr. Warren. I noticed that the senator looked like a student trying to remember answers after a long cramming session.
Listening to the Senator is a tedious affair for me. Most of the time, all I can discern is something like the following:
The one thing I think is very important is to deeply think about the serious implications of the concern for the honest revaluation of the complex interrelationships that exist and we are all aware of and have to take into account considering the full ramifications and caring very much about the unintentional consequences of the actions that were originally intended ...
Needless to say, that is not an actual quotation.
The whole thing would have been a blur to me except for the exchange after Mr. Warren asked the Senator to define what it means to be rich.
Given that the Senator represents the point of view that the role of the government is to take from the rich to give to the poor, his answer to this question was going to be revealing.
Between minutes 34 to 38 in the video, the Senator claims that an annual income of $250,000 defines, with some caveats, who’s rich in the U.S. Then, he goes on to say that, while no one likes taxes, they are necessary to ensure that young people get a good education and the national debt can be paid down. He also mentions the Iraq wars and states that it is irresponsible to spend 10 billion dollars a year month on it. He also notes that, under his plan, filers with incomes below $150,000 will see an income tax cut and filers with more than $250,000 will see a tax increase which he refers to as a modest one.
If I wanted to be pedant about such things, I would point out that rich is a stock concept. Whether one is rich is determined by one’s wealth. On the other hand, income is a flow concept. One can become rich by accumulating that flow and turning it into a stock of wealth.
The Federal Income Tax is a tax, by definition, on that flow. Some people who making $50,000 in taxable income today are rich because of past accumulations. Some people making $250,000 taxable income today are just beginning to accumulate and may or may not become rich depending on whether they can continue to accumulate.
I am not going to worry about this distinction between income and wealth for now but it is an imprtant one. Blurring this distinction allows the already rich to argue for preventing others from becoming rich safe in the knowledge that their wealth will not be taxed.
Government expenditures comprise a large share of the U.S. GDP. The most recent individual income tax data available from the IRS covers the year 2006, so let’s take a look at the national accounts for that year. (The relevant information from the IRS worksheets can be seen in this compact table).
In 2006, the government sector spent about 4.2 trillion dollars. Of that amount, approximately 1.6 trillion dollars were government social benefits to persons. That is, 1.6 trillion dollars were taken from some and given to others to improve the living standard of the recipients.
Those 1.6 trillion dollars of social benefit payments to individuals correspond to roughly 12% of the 2006 U.S. GDP. By contrast, all national defense expenditures in 2006 add up to 624 billion dollars corresponding to about 5% of the U.S. GDP.
I will try to put those social benefit payments in perspective. According to the U.S. Census Bureau, there were 37 million people living under the official poverty line in the U.S. Therefore, 1.6 trillion dollars in social benefit payments corresponds to a little over $42,000 per person living under the poverty line.
In 2006, 91 million people in the U.S. lived with incomes under twice the poverty level. So, if we consider not just the poor but also people close to being poor, the 1.6 trillion dollars in social benefit payments corresponds to over $17,000 per person in that category.
According to the 2006 poverty thresholds a household with a single mother and two children would be considered poor if their household income was below $17,000. If the 1.6 trillion dollars were to be divided evenly among everyone making less than twice the poverty line, this family would have gotten an additional $51,000 per year from the government (and would no longer have been considered poor with an annual income of $68,000).
If the purpose of these social benefit plans were to help people out of poverty, they have clearly failed. In fact, the bulk of those transfers comprise Social Security ($500 billion), Medicare ($325 billion) and Medicaid ($186 billion).
According to IRS statistics, 138,394,754 income tax returns were filed in the U.S. 134,329,872 of them, that is, 97% of all filers, reported taxable incomes of $200,000 or less.
Now, the Senator’s choice of brackets makes direct comparison with IRS data a little harder (and I do not have the means to work on raw data right now), but let's take a look at that 3% of filers who reported more than $200,000 in 2006.
The vast majority of those filers, 3,121,485 out of the 4,064,884, were in the $200,000 to $500,000 bracket. Filers in that bracket paid, on average, $56,831 in taxes in 2006. The federal government netted 177 billion dollars from this group.
On the other hand, filers in the $100,000 to $200,000 bracket paid an average of $17,388 in taxes. The federal government collected 210 billion from this group.
How is that possible, you may ask, that filers in the lower bracket paid more in taxes than filers in the higher bracket. Simple, the number of people in the lower bracket is four times the number in the higher bracket.
In fact, total taxes collected from the filers in the $100,000 - $200,000 bracket is more than five times the amount collected from filers in the $5 million to $10 million bracket for the simple reason that there are only about 25,000 filers in the latter bracket.
As of August 18, 2008, the Senator lists, among others, the following spending proposals:
The total proposed expenditure on just the items listed above is about $83 billion. If you include the $500 tax cut for 150,000,000 workers at full face value, the total comes out to be about $158 billion.
Can this amount of money come from the 4 million filers reporting more than $200,000? If it did, it would amount to an extra $39,500 tax liability per filer in that group.
If it were to come from filers with more than $500,000, that would be an additional tax liability of $167,000 per filer in that group.
If it were to come from filers reporting more than $1 million, that would be an additional tax liability of $446,000 per filer in that group.
Were it to come from filers reporting more than $1.5 million, that would be an additional tax liability of $775,000 per filer in that group.
How about those making more than $5 million a year? That would require filers in that group to pay an extra $3.9 million in taxes per filer.
Clearly, neither $39,500 nor $3.9 million are modest tax increases. Of course, I ignore the possibility that, faced with the prospect of forking more than the annual tuition at Harvard to the federal government every year, filers may try very hard not to venture into the $200,000 to $500,000 category.
This kind of back-of-the-envelope crunching of numbers is useful in establishing if the numbers “work”. After this exercise, I am left with the distinct impression that the Senator’s numbers do not: That is, he cannot accomplish what he wants with just a “modest” tax increase on the “rich”. For any modest tax increase to raise a lot of revenue, he would have to include the 41 million taxpayers in the $75,000 - $200,000 brackets as well. After all, filers with taxable income of $75,000 or more paid almost 92% of the federal income taxes.
Even then, things look iffy: Let’s suppose the Senator can squeeze an extra amount equal to 10% of average taxes paid from every filer with taxable income of $50,000 or more without creating any incentives for tax avoidance whatsoever. That still gets him only $95 billion in 2006 dollars (should be about $105 billion in today’s dollars).
To reach the $158 billion dollars (the cost of the proposals listed above), the Senator would have to find a way to squeeze an extra 10% each out of the filers in the $50,000 to $200,000 bracket and an additional 20% in taxes from filers with taxable incomes above $200,000.
Are these modest increases? You can be the judge of that. Just keep in mind that I have not included the extra $50 to $65 billion dollars a year the Senator says on page 4 of his healthcare plan. The Senator claims that most of these costs will also be covered by increasing taxes on people with incomes more than $250,000.
Update: May 4, 2010 The video excerpt I referenced was later removed from YouTube. Post adapted accordingly.
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