Why does the promise of raising taxes to the rich always end with higher taxes to the middle class? In this short video we explain it.
The interventionists promise large funds and expenditure plans for all kinds of projects that they intend to finance by “raising taxes on the rich”.
Those expenses, of course, are true, real ones. However, their revenue estimates are simply overoptimistic. Under Obama, the average federal tax rate paid by the top 1% of households went gone up more than 6 percentage points to an estimated 33.8%, according to the Tax Policy Center.
What ensued was: Debt and deficits still ballooned and the middle class suffered even more tax increases.
How does this happen?
First: Spend more. The historical average of over-spending on budget is 10% in the past eight years. Federal outlays far exceeded the government plans and estimates, raising the debt ceiling in three occasions. This has been an issue in almost every administration of the past twenty years. From 2008 to 2009, federal spending jumped 17.9 percent, reaching $3.5 trillion, going to $3.9 trillion in 2016.
Second: Revenue estimates are not even remotely enough to cover the rise in spending. Tax revenues did increase in absolute and relative to GDP terms. However, spending increased even more.
When its recovery plan was announced, the White House predicted an average growth in the economy of 4-4.5 percent, and the budget deficit would shrink to 3.5 percent of GDP . Public debt ballooned from 48% to 75% of GDP and average annual deficit was 5.2%. Total receipts, despite the recovery, low unemployment and a massive stimulus, fell short of estimates by almost $110 billion in 2016 alone.
After $1.5 trillion in new taxes, debt increased by $10 trillion. In 2013, increasing the employee payroll tax from 4.2% to 6.2% made an average worker earning $50k a year pay $1k more in taxes.
We must remember that the average error in estimates of new tax revenue in the OECD has ranged between 20% and 50%.
At the end of the day, it is plan and simple maths. The estimates of revenue increases are made by the same government officials that benefit from increasing federal outlays because it increases their power, and when those revenues fall short of magic and unachievable expectations, you pay. They win.
You cannot fund trillions of dollars by raising taxes on a few thousand, as rich as they might be. The promises of billions in spending funded by the rich becomes the reality of more debt and higher taxes to everyone.
Very real expenditures, very real debt increases, and very idealistic optimistic tax receipt estimates. An equation that always ends in “raising taxes to all”.
The next time you read that billions of new public spending will be financed by the wealthy, remember it will be you who pays.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP)