We told you on Monday that eliminating the Bush tax cuts for individuals making more than $200,000 per year, as demanded by the President, would theoretically raise $82 billion in revenue per year. (More on that point later) Today we learned that the President wants more.
Mr. Obama is also expected to call for $1.6 trillion in tax revenue over the next decade when he meets with congressional leaders.
That’s $160 billion a year in new taxes, or twice what the President’s original demand was.
Can anyone guess the identity of the taxpayers who will be forced to cough up this extra $80 billion per year?
But, there is another point to be made…eliminating the Bush tax cuts for the “wealthy” will never raise even the original $82 billion projected because the projection is based on erroneous assumptions.
The Congressional Budget Office engages in what is known as a “static analysis” when making the projection. It assumes that the same number of people making more than $200,000 per year will make the same amount of money after the tax increase as before. This never happens…ever.
One need look no further than the state of Connecticut. It recently passed the largest tax increase in the history of the state only to be shocked and amazed to learn that tax revenues did not increase as expected, but rather are currently running some $128 million below what was projected.
There are an assortment of reasons for this, chief among them is that people change their behavior in response to a change in tax rates. If the “magic number” to cause an increase in tax payments is $200,000, people will shelter, or defer income so that they are only making $199,000.
Beyond that, when the government sucks, in this case, another $82 billion out of the economy, there is less money to invest in the economy. A businessman will not expand his “widget” factory as the money to do so is now being paid to the federal government in additional taxes. And with that, the businessman who makes “widget factories” has less income, and thus will pay less in taxes. That is compounded by the fact that both businessmen will need to adjust other things. The first will not look to hire new employees to run his expanded business, and the second will be forced to lay off employees to account for his shrinking business.
This is simple Economics 101.
Why is this administration incapable of understanding this?
And why does it refuse to look at history which substantiates this?