President Barack Obama recently announced a “deficit reduction plan” that includes both a massive tax hike and a massive increase in federal spending.
Insisting that the only way to close the deficit gap is for wealthy Americans to pay their “fair share,” the president asserted, “This is not class warfare. It’s math.” His math claimed the plan will save $4.4 trillion over the next 10 years — but many of the purported spending cuts were already in the budget.
After accounting for cuts already enacted in this summer’s debt limit deal ($1.2 trillion), the already-planned troop drawdown from Afghanistan ($1.1 trillion) and the certain fix to Medicare reimbursement for doctors ($300 billion), the 10-year reduction in the deficit is just $1.8 trillion.
When you consider that $1.5 trillion of that deficit reduction is achieved through a massive tax hike, it becomes clear that the president’s plan has little to do with restraining spending. As a matter of fact, the president’s proposal increases net spending over the next 10 years by $162 billion.
But the biggest problem with Obama’s math is his assumption that massive tax increases will actually produce the new revenue he wants to spend. According to a recent analysis by the Republican staff of the Joint Economic Committee, increasing taxes on the top 1 percent of earners would produce less than 30 percent of the revenues that the administration is counting on.
In other words, the proposed tax increases forecasted by the president to generate $1.3 trillion over 10 years (by letting the Bush tax cuts expire and limiting itemized deductions for the wealthy) would, in fact, only yield $361 billion in additional revenue, after accounting for changes in behavior by those subject to the higher taxes. The other $915 billion in hoped-for tax revenue would never appear.
Over the past 40 years, federal revenue from capital gains has been highly sensitive to tax rates: revenues have consistently declined when tax rates have risen, and capital gains tax revenues have risen when rates have been cut.
When you punish people for investing, they invest less. This creates fewer capital gains for the IRS to tax.
A far more effective way to increase government revenues and close deficits is to focus on economic growth rather than attempting to squeeze more money out of the wealthy, which is counterproductive in terms of raising revenue.
It’s simple math.
Rep. Mick Mulvaney, R-S.C., is a member of the Joint Economic Committee.