In order to cut the deficit in half (which has already tripled in one year), Obama plans to keep his campaign promise and tax the "rich" so that we can make up the difference. Alright, so he also has a unrealistic picture of growth while we are taxing the "rich." The problem is, it won't work. It hasn't before, and it won't now.
"Rich" really needs to be defined (along with "Middle Class" which 90% of Americans think they are a part of). Who are the "Rich"? Politicians take a simplistic approach and say anyone who makes more than $250,000 is "rich," but really, these people just have high incomes. "Rich" has more of a connotation of wealth, not income. But lets play along anyway and pretend that everyone making over $250,000 is "rich" and needs to be soaked.
We can tax them and get some more money. This will work for a year (maybe). Unfortunately, taxes are an expense that thinking people and businesses take into account when making decisions (for better or for worse). Let's take a sample family. I love these because they are so fake you can make them however you would like.
John is a doctor who makes $250,000 a year. His wife Jane is a college professor making $100,000. They have 2 children. So they are rich. Right now, they donate $40,000 to charity, pay mortgage interest of $40,000, and they put $40,000 into tax deferred retirement accounts. So $120,000 of their income is not taxed. So their actual income that is taxed is $230,000. Which after tax credits is about $50,000.
Then the new tax structure goes into effect because John and Jane aren't paying their fair share. They are "Rich" after all. If nothing else changed, then John and Jane would end up paying about $7000 (taking into account he higher tax rates and the lower deduction rates that have been proposed).
Except that John and Jane are thinking people, and they may decide that with this extra expense, it may not be worth it to continue with the lifestyle they have. They do some calculations and figure if Jane stops working they they lose $100,000 of income (of which $40,000 was spent on state and federal taxes - including SS). However, they could take their two children out of private school which was costing $25,000 already (she is a college professor so she may want to home school them). Decrease their charitable donations by $10,000. Decrease their retirement contributions by $10,000. And sell their home and move into something lower priced and only be spending $25,000 a year on mortgage interest (a $15,000 savings). Let's see, we add that all up all of those savings 40+25+10+10+15 = $100,000. And they haven't even started to cut back on their day to day lifestyle. With one parent at home, there may be several advantages (in fact, she may volunteer for a charitable foundation and provide them services that are worth more than the $10,000 she was donating before).
What does their tax situation look like now. $250,000 - $25,000 interest - $30,000 charity - $30,000 retirement = $165,000 or paying about $30,000 in income taxes. Do you think they can still live comfortably on $165,000. Oh yeah.
This underlines the problem with trying to tax the "rich" (aka high earners) as opposed to the middle class and poor. The "rich" make enough money to have options and can afford to decrease their income to avoid paying taxes (legally) and have a better lifestyle. The middle class have fewer options since the majority of their income is used for mandatory expenses. The poor have no discretionary income. So they don't have any options.
So instead, let's tax wealth (i.e. the really rich). This is done through capital gains taxes, wealth in the form of stocks, bonds, and real estate is taxed when sold. Except for a problem here. "When sold" means if you don't sell it, it isn't taxed. Do you think maybe rich people would decide not to sell stocks then? We already have a home capital gains deduction that shields about $250,000 of profit from the sale of a home. If we raised the capital gains tax rate, would we maybe see stocks not be sold? Problem is, that is the exact opposite of what we need. There is a glut of homes on the market and stocks at the prices they are at basically means the same thing. What we need is people to buy them (hence, someone has to sell them).
How about this, we will enact a larger excise tax on luxury items like yachts and airplanes that only the rich would buy, then the poor won't pay that tax. Oh, wait, we tried that already under Bush I, and all it did was kill the yacht industry in the US (who employed middle and lower class people) because the rich stopped buying yachts (it was discretionary for them). So much for the poor not paying that tax.
Whenever we enact policies that are counterproductive to growing the economy, is it any wonder that the economy doesn't grow? Moreover, since government hasn't been known to be the fastest movers on issues, but they certainly like to talk it all up, are we really surprised that the economy has tanked since the election of someone who promised that he would enact policies that do not grow the economy (in spite of all of the hope and change he spouted)? America voted for change, maybe next time they should be a little more specific.
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