Obama wants to tax the top 2% in order to balance the budget, a campaign line that Obama has used since 2007. Unfortunately, that won’t solve the problem, not even if we taxed the top 2% at a 100% rate. The Wall Street Journal researched this in 2009, using data from 2006, at the peak of the last expansion, when everyone was doing well:
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and “the wealthiest 2%.” Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That’s about 7% of all returns; the data aren’t broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% — about 1.65 million filers making above $388,806 — paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income. …
But let’s not stop at a 42% top rate; as a thought experiment, let’s go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable “dime” of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
Needless to say, even a smaller amount of confiscation would divert capital from actual business-expanding enterprises to government bureaucracies, further slowing, stopping, or even reversing the meager level of growth we have now. That would create a decline in revenue that would probably equal or best the supposed windfall that would come from increasing the top rate to 39.5%, effectively making the deficit situation worse.
That’s the reason no one but Obama is talking about tax increases any longer — they won’t solve the problem. Only substantial reform in federal spending, including and especially entitlements, will address the fiscal catastrophe we face. Instead of showing leadership, Obama is still running his class-warfare 2008 campaign