Can Obama keep his tax promises?
While promoting his health care reform plan yesterday, President Obama emphasized that he would not raise taxes on the middle class to pay for his plan. This is consistent with his campaign promise to not raise taxes on families making less than $250,000 a year.
When politicians concede that tax hikes are necessary, they usually promise that they will only raise taxes on the rich. But if you look at how much of the total taxable income in the United States is earned by the rich, you discover that is not as easy as it sounds. I compiled a graph of this information a couple years ago.
In the chart below, the green line represents how all the income in America is distributed across income levels. (The red line shows how the number of households are distributed across income levels.) My analysis indicates that less than 20% of the income in America is earned in households which earn more than $250,000 per year. The general public may believe that there is a vast pool of income earned by the rich which can be tapped to pay for generous spending programs, but the reality is that most of the income in America belongs to the lower and middle classes.
7 Responses to “Can Obama keep his tax promises?”
Actually, according to most published reports, the top 20% owns over 80% of all wealth.
Ahh, but that’s wealth, not income. Unless Obama’s planning to enact a federal property tax, accumulated wealth won’t help fund his health care plan.
(By the way, even among middle-class folks, a minority of households own a majority of the wealth. They are known as retirees. It makes sense that someone who has been working and saving for 40 years would have a lot more wealth than someone who has just entered the work force.)
Assuming this is a probability density function for the random variable X=HouseHoldIncome, this is not the critical random variable of interest. Given two limits, a,b for household income, if you integrated the function X, you would get the fraction of people in the country earning between a and b. I would like to see would be the random variable Y, the fraction of the total dollars of earned as the random variable. Then if you integrated between limits, you would get the fraction of the earned dollars in the country earned by people with annual incomes between a and b.The random variable would be a distribution of wealth rather than a distribution of rank. Maybe a distribution of Z, the total of the wealth of the entire country as a density function. There might not be many people making a million a year, but the fraction of the wealth of the country held by this group might be more interesting that the fraction of such people by number in the country.
So, I’m not sure I agree with the concept of this post and I have data that is recent and fits in to the discussion. The WSJ a couple days ago posted an article showing that when you count salary income (not investment income, which is even more tightly concentrated) right now people who are considered “highly paid executives” (by whatever their definition is) were, as of 2007, earning 33% of the total take home wages in this country (it’s like a $6 trillion pie and the tip of the iceberg was taking home $2 trillion). It’s also worth noting that the %age going to the tip of the iceberg has skyrocketed in recent years.
That did not include investment income, stock options, and the various other types of “Compensation” that are reserved for the wealthiest of the wealthy, much of which is taxed at even lower rates or is subject to other large deductions. I’m not sure that squares with the data here.
Balta,
I would guess highly- paid exeecutives include the small army of those in middle management earning six figures but under 250,000.
Really, when you think about it, the 250,000 promise is kind of ridiculous. Obama promised everything to everyone, health care for all, carbon reduction, tons of new infrastructure projects, etc. while only increasing taxes on small sliver of the population.
In reality, there’s only three choices. We increase broad-based taxes to pay for Obama’s promises, we do not increase taxes and do not implement Obama’s promises, or we implement his promises and do not increase taxes, and all of us follow Mark Sanford down to Argentina.
With the numbers that the top level earners are actually taking home, the math seems to work that he actually can do it. Their tax base has declined so dramatically in the last 30 years and especially in the last 10, even letting the Bush Tax Cuts expire and then applying the Surtax to fund the health care system will still leave the effective tax rates on the to .01% (the after-deduction tax rate) lower than it was in 2000, if the math I’ve seen is correct, because of all the other changes to the code over the years and the increasing concentration of income.
For what it’s worth, the graph is based on data from the Census Bureau and the IRS from 2004 and 2005. (I originally created the graph in 2006.) Additional details can be found in my original post. I’m quite certain the graph is an accurate picture of the time, but if anyone finds an error in my methodology, I’d be eager to hear about it.
Balta–I notice you mention “take home pay.” Is that after taxes and other payroll deductions? Because social security taxes are capped at a certain amount and employee insurance charges are more or less fixed, I would expect that “take home pay” would tilt more heavily toward the rich than gross wages.
Assuming, arguendo, that the “tip of the iceberg” is taking home (after taxes) $2 trillion annually, Obama could pay for his health care plan by taxing 8% of that income. However, an 8% increase in tax rate could cause some real pain to a household making “only” $250,000 a year (especially if that household lives in Manhattan). And, of course, the more progressive you make the tax hike, the higher the highest tax bracket goes.
So, yeah, it’s theoretically possible to pay for new programs by taxing only the rich, but 1) let’s be realistic about what kind of tax rates we’d be talking about, and 2) you can’t just keep going to that well forever.