Wednesday, February 25, 2009

Obama needs to do his math again

Obama has defined "rich" as anyone making over $250,000/year. Last night he vowed that nobody earning less than that would pay a dime in extra taxes as a result of all the things he has proposed. If we take that to include the $800 billion stimulus bill, it's tough to see how the numbers add up.

Based on data complied by the Tax Foundation for 2006, here is what we know: The top 1% of income earners (1.4 million taxpayers) had $1.8 trillion of adjusted gross income and paid $400 billion in federal income taxes. It took an income of at least $389,000 to qualify for that distinguished group. The top 2-5% of income earners (5.4 million taxpayers) had $1.2 trillion of AGI and paid $200 billion in federal income taxes. It took an income of at least $154,000 to qualify.

I'm going to assume that incomes aren't significantly higher today than they were a few years ago, and I'm going to interpolate and guess that the top 2% earn at least $250,000 per year, make about $2 trillion in income, and pay about $450 billion in income taxes.

A senior administration official announced today that "Obama will propose $634 billion in tax increases on upper-income taxpayers and cuts to government health spending to fund health reform over 10 years," and that "The proposed tax change would limit the deductions available to people in the highest income tax brackets."

Over the next three years, if he gets his way, I figure he is going to be spending an extra $600 billion or more on a the combination of "stimulus" and universal healthcare. That's probably a conservative estimate, since the Wall Street Journal's Op-Ed today guessed that universal healthcare alone would cost at least $220 billion a year. I don't think he can make significant cuts to health spending, and I figure he is lowballing his cost estimates. If he wants to bring the deficit down and not raise taxes on 98% of taxpayers, that means that the IRS is going to need to take at least an additional $200 billion a year out of the pockets of the "rich," if not much more. That means that the "rich" are going to need to cough up about 50% more in taxes per year, and that money will supposedly come as a result of the expiration of the Bush tax cuts and the elimination of most if not all their deductions. I just don't see how anyone can (or should, for that matter) try to pick the pockets of the rich for that much money. Even Robin Hood would never have been so brazen.

The magnitude of Obama's attempt to expand government at the expense of a tiny minority is just simply mind-boggling; so outrageous, in fact, that it is highly unlikely to work. If he succeeds in getting universal healthcare, the middle class will find themselves eventually saddled with huge new tax burdens and medical care that will be rationed by a group of "enlightened" bureaucrats.

The thing people need to remember about universal healthcare is that it cannot possibly be cost-effective. If you offer healthcare to everyone for "free," the laws of economics and human behavior dictate that the demand for healthcare will exceed the supply of it. Sooner or later it will have to be rationed, just as it is in places like Canada and the U.K.

And to think that we could probably solve 80-90% of the healthcare problem by simply changing the tax code so that anyone, not just employers, could deduct the cost of healthcare insurance. This would reintroduce basic market dynamics to the healthcare market, and that is the only thing that can make healthcare cost-effective and widely available.

9 comments:

Mark A. Sadowski said...

Technically health care is already rationed in the United States. Many people, for various reasons, fall through our system's cracks and end up losing their life's savings because of one serious ailment of a family member. (As the old Jack Benny joke goes: Robbers: "Your money or your life." (Pause) "Well!" Victim: "I'm thinking.")

My feeling is that the pendulum on income inequality has swung too far in our country. I came across the following research paper recently:

http://econ.barnard.columbia.edu
/~econhist/papers/InequalityWF.pdf

In short, to restore some balance to our economy, and consequently restore its long term growth prospects, which will benefit people of all income and wealth classes, we need to do the following. We need to increase the minimum wage still further, we need to make it easier to unionize, and we need to make taxation more progressive. I know this is a bitter pill for anyone with Laissez-Faire principles to swallow, but I truly believe we will all be better off in the long run.

Incidentally, I came across this research article by linking to the following CATO Institute article:

http://www.cato.org/pubs/wtpapers
/Nostalgianomics.pdf

I guess I'm just a sucker for Paul Krugman's "Nostalgianomics."

Scott Grannis said...

Our current healthcare system is insane. If you don't have insurance you pay the "list price" for healthcare services, and that is typically double and triple what the cost would be if you had insurance. Why? Because insurers want to show that they have negotiated a good deal with the providers. If insurers didn't have a tax-driven monopoly on healthcare--if consumers were in charge of buying their own policies--that wouldn't happen.

Increasing the minimum wage will only hurt the very young workers with no skills. Only about 2% of the workforce earns minimum wage anyway.

Taxation is already so extremely progressive that the top 10% already pay 70% of all income taxes (see my recent post). This is crazy. It is dangerous to rely so heavily on a such a small segment of the population. This kind of tax system is destroying California.

Paul Krugman has lost all his credibility with me.

Mark, you need to spend some more time poking around the Cato website and reading their stuff. It's very good, unlike Krugman's.

Mark A. Sadowski said...

Scott,
The the whole point of insurance, to pool costs so that we all pay less in the end.

David Card and Alan Kreuger's research implies that increases in the minimum wage improved the welfare of those who recieved such wages. The bottom line seems to be that young workers made more money and had more time for studying and that this improved their academic performance. I think that anyone who is reasonable would believe that this would be beneficial to the long term growth of our nation's economy:

http://press.princeton.edu/titles
/5632.html

As for the fact that the minimum wage only applies to 2% of our workers that is only because it has been so low lately (the lowest in inflation adjusted terms since 1948). Near its height in 1980-81, the minimum wage applied to 15% of workers. Incidentally that was when earnings inequality was near our nation's lowest in terms of the Gini index.

Payroll taxes, which are the most regressive of all taxes, and which form a sizable amount of our total federal taxes, form the majority of federal taxes for 85% of our nation's population. Unless you are at war with 85% of the American population, it would not be desirable for you to be opposed to a system of taxation that is more progressive than the one we have now.

And when one looks at the superrich, those who make most of their income through unearned income, their effective taxrate is often less than 20% (Warren Buffett for example). Compare this to a middle income top marginal tax rate of over 50%. We need to start taxing the supperrich in a more equitable way.

I personally think you need to spend less time reading CATO Institute materials and more time reading the Krugman economic blog.

Bernard said...

Mark,

Unions served their purpose in raising the standards of employees during the industrial age when working conditions were abominable. Not having a lifetime guaranteed retirement or healthcare package does not count as abominable and artificially setting market rates for wages while blocking out non-union workers destroys the fabric of our economy. The only reason to join a union is because you either have to in order to get the job, or would conveniently receive something you would not normally qualify for on your own. The mere fact that unions need to collect dues to administrate their business tells you enough about what a waste they are.

Minimum wage is a right of passage for teenagers. Nothing more, nothing less and becoming more progressive with taxes will ultimately hurt the middle class by sucking down the upper echelon of this group into mediocrity. Then we can all be one big happy family of unmotivated, undercompensated, beggars looking for Uncle Sam to pave our way. Ugh!

Scott, say it a'int so!

Mark A. Sadowski said...

Bernard,
Read the empirical research and then repute it. Unions, minimum wage laws and progressive taxation reduced income inequality in the United States between 1947 and 1980, the most prosperous time (in terms of median earnings growth) in our nation's 233 year history.

Scott Grannis said...

For me, only logic matters. There is no logic in setting a minimum wage that is higher than what the market would otherwise want to pay.

Jude Wanniski convinced me years ago that the minimum wage is detrimental to the interests of the poor. Anyone who is going to work for minimum wage does so because he or she is probably very young, inexperienced, or unskilled. Getting your first job is like climbing up a ladder starting with the first step. If that step is too high, you can't climb it. In order to gain experience and skills that then translate into higher earnings, you've got to start somewhere. Setting a high minimum wage just makes that more difficult. And only 2% or so of the workforce makes minimum wage, so I don't see how in the world that is going to address income inequality. And I don't see why income inequality is a variable that should be targeted by government policies to begin with.

Mark A. Sadowski said...

For me empiricism only matters. I only look at the numbers. Theory that does not agree with the numbers needs to be jettisoned (or at least taken with a grain of salt).

In the final analysis, those models were symplified excercised that were never meant to be taken as complete explanations of a rather complex reality. As a teacher I ought to know.

Jon S. said...

Mark is giving us a new meaning of the word "empiricist:" a grad student who selectively cherrypicks data to arrive at a predetermined conclusion.

Now I understand for the first time the engine of postwar economic growth: unions, minimum wage laws and progressive taxation. And to think I thought our success was due to low taxation, expansion of money supply, conversion of the wartime economy to consumer products, the Marshall Plan, the move to an increasingly service economy, agribusiness consolidation, a business-friendly investment climate that expanded production to meet increased demand -- and these are just off the top of my head. Silly me!

Mark A. Sadowski said...

I suppose there is a research paper that shows one of those issues you mentioned is a realistic concern. Send me a link if you have the time from spreading your ideological message.