Sunday, December 5, 2010

Let's get real about "the top 2%," spending, and debt

First off, the debate about the Bush tax cuts you are hearing is a phony one. Regular readers of know that I'm as populist as they come. It's in my bones. It's just the way I am. And I can sense phony populism a mile away. This entire "we need to tax the top 2%" argument by some of the Democrats misses the mark, won't fix anything, and is fraudulent, at best.
Let's look at the "top 2%" ... who are they? Households earning more than $250,000, according to the Census (Note: This data will be corrected after the Great Recession numbers start trickling in, with those incomes dropping even lower ...).
Now, that looks like a lot, especially from way down here. And it is. But these folks aren't millionaires. At $250,000, that's two high level professionals. Many of them can pay more in taxes, for sure, assuming that they don't have huge housing, school, credit car, car debt, or property tax bills. But it's their money. Why should they pay more when the federal government already wastes enough money?
The best data to look at is from the IRS which breaks down the data at the $200,000 level, according to the WSJ. There were 3.8 million tax filers in this bracket which is about 7 percent of all returns in the U.S. According to the WSJ, these people paid about $522 billion in taxes or 62 percent of government revenue for 2006. The richest 1 percent, about 1.65 million filers, making nearly $389K, paid $408 billion or 40 percent of tax revenues while earning only 22 percent of the report U.S. income. In other words, rich people really do already pay quite a bit of money into the federal coffers.

Fun with rates
When looking at the Bush tax cuts which are about to expire, it's important to note that the richest people only received a 3.6 percent tax rate cut (38.6 to 35 percent) in the first place while the lower earners received 5 percent cuts (and most lower earners now don't pay anything in federal income taxes. In fact, 40 percent of filers in the lower income brackets pay $0 in federal income taxes now). Yes, one can look at this the other way, It's only a 3.6 percent increase so why complain? However, no one has yet to tell any of us on what effect, positive or negative, this tax increase will have on the supposedly recovering economy.
The WSJ did do an interesting experiment last year. One of the writers said, Hey, why stop at 40 percent, what would happen if the government took all the rich people's money?
According to their figures, if the government took 100 percent of the taxable income of every American making more than $500,000 in 2006, Congress would have $1.3 trillion or less than half the 2006 budget and about one-fourth of the FY10 budget. In other words, even taking all the earnings of the rich, the government still wouldn't have enough money to run the government (The government has to take every single dime of everyone making more than $75,000 to cover the entire federal budget for FY10).
But even though all those rich people pay all those taxes, let's be honest: None of them pay the rates that are listed. None. If you're a millionaire, meaning in the fraction of 1 percent of filers in the U.S., you're never paying 35% or 38.6%. Never. You're rich enough to hire attorneys and accountants to find ways around the tax code so you never pay that amount. You give more of your money away to your charities, where you can be praised at parties and in the newspaper, just so you don't have to pay the government.
I always use the example of George H.W. and Barbara Bush's tax filing from 1991, before the highest rate was reduced. The two earned $2.3 million and paid 9 percent of that amount to the government in income and SSI withholding. In 1991, I earned about $16,000, and paid 23 percent of my income in state, SSI, and federal taxes. Did I pay more actual dollars? No. But I paid a higher percentage that the millionaires did. It's the same today.
That's why all these arguments about rates and everything else is a bunch of hooey. That's why when the debt commission proposing lowering the rate but making it solid, meaning with fewer deductions and loopholes, it's the right way to go because then rich people will actually be paying the higher rate and not hiding their money from the government. It is really that simple.

Spending, already ...
What does this all mean? Well, Houston, we have a spending problem.
Federal government spending is simply too high, too burdensome, and now, running up so much debt it's impossible to see where things really get fixed. In addition, while I haven't gone through the entire debt commission report, from what I have seen, there are good and bad things and, frankly, it may not go far enough.
Ideally, even if it hurts the supposed recovery, we should have a sweeping debt reduction program in order to free up more money for regular government spending. What's that? How's that possible? Well, the federal government spends so much money at this point on interest, it's taking away much needed dollars for programs.
In FY10, the interest on the national debt came in at $413 billion. Imagine for a moment what that money could be spent on if it wasn't being awarded to the people, businesses, and countries that buy the government's debt bonds. Even if we could get back to debt interest levels of 1988 of around $214 billion, the government would have almost $200 billion to spend on other things instead of lining the pockets of mostly rich people and China who are getting rich off our government's debt.
This is why debt reduction is so important. And it's more than just taking all the rich people's money. It's about living with less in the federal budget. It's about going through line item after line item after line item and saying, "Is this really necessary? Is it? No? Well cut it already."

Real debt figures
Here's another interesting fact that I thought I would throw out there, since there is some contention on what president created the most debt. There is a really great chart in this week's TIME magazine, that shows large, sharp spikes in all kinds of data. When I saw it I was like, Hmmm, it looks like the Obama and the Democrats have created as much debt in less than two years that Bush and the Republicans (and Democrats) did in eight years.
So, I had to go fishing around for some figures and from different news agencies and the U.S. Debt Clock, here's what I found:
* President Obama and the Congress controlled by Democrats have created about $3.25 trillion in debt in about two years.
* President Bush, with houses of Congress controlled by Republicans mostly but Democrats in the last two years of his administration, created $4.9 trillion in debt during eight years in office.
So, no, it's not the same, but it is pretty close. By the end of next year, it looks like, they will be even, with the Republicans running Congress.

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