Innumerate

“Innumerate” is a neologism, presumably analogous to “illiterate”, that means ignorant of mathematics or, more simply, unable to count. I’m increasingly coming to believe that President Obama is innumerate, thinks we are, or both. In his speech on Tuesday President Obama re-asserted his pledge that those making under $250,000 wouldn’t see “one single dime” of tax increase while those with incomes higher than that were pretty likely to see tax increases.

I have no opposition to increasing taxes on the well-to-do. I’d like to see more of that in the form of raising or eliminating FICA max but no matter. I do think we should understand the limitations of increasing the marginal income tax rate on those making more than $250,000.

This morning the Wall Street Journal put it succinctly:

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.

Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.

Mr. Obama is of course counting on an economic recovery. And he’s also assuming along with the new liberal economic consensus that taxes don’t matter to growth or job creation. The truth, though, is that they do. Small- and medium-sized businesses are the nation’s primary employers, and lower individual tax rates have induced thousands of them to shift from filing under the corporate tax system to the individual system, often as limited liability companies or Subchapter S corporations. The Tax Foundation calculates that merely restoring the higher, Clinton-era tax rates on the top two brackets would hit 45% to 55% of small-business income, depending on how inclusively “small business” is defined. These owners will find a way to declare less taxable income.

The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can’t possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.

I wouldn’t be a bit surprised if “one single dime” became Barack Obama’s equivalent of “read my lips”.

I also think there’s a tendency among those in government to overestimate the amount of revenue they can expect from raising taxes. A stiff increase in the marginal rates in the upper brackets would encourage evasion and would provide substantial incentive to reduce tax liabilities. And people in the upper income brackets are precisely those best equipped to hire an army of tax lawyers, accountants, and financial planners to do just that.

And this isn’t 1940. Their feet aren’t nailed to the floor. That’s been the experience in California where high taxes have motivated the rich to pull up stakes and take their money elsewhere. And then where are you?