The Washington Examiner - The President's Tax Math Doesn't Add Up

Op-Ed

By Representative Michael Mulvaney

President Obama recently announced a "deficit reduction plan" that includes both a massive tax increase 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 anticipated the inevitable charges of political demagoguery by asserting that "this is not class warfare. It's math."

Well, let's take a look at the president's math. He asserts that his plan will save $4.4 trillion over the next 10 years -- but many of the purported spending cuts were already baked into the budget cake.

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 increase, 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 Obama administration is counting on.

In other words, the proposed tax increases that are forecast 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.

The same goes for the president's proposal to raise the top marginal tax rate on capital gains from 15 percent to 20 percent (with an additional 3.8 percent investment income "surtax" starting in 2013 that was signed into law as part of Obamacare).

Unfortunately for the president, this rise in capital gains taxes will not only fail to generate the revenue that is estimated, but will probably reduce tax revenues from capital gains.

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. And thus create fewer capital gains for the Internal Revenue Service to tax. When this was pointed out to candidate Obama in 2008, he acknowledged the "math" but added that he would still support raising the capital gains tax rate for the sake of "fairness."

The president's rhetoric seems to be operating on the premise that our fiscal crisis could be solved if only the wealthy were paying "their fair share" of taxes. The fact that those earning just 30 percent of all income pay 52 percent of all income taxes shows that the so-called "wealthy" are already disproportionately taxed.

And the top 1 percent -- earning 19 percent of all income -- pays nearly 40 percent of all income taxes. This logical disconnect is indicative of the way this administration thinks about the economy: a static, zero-sum game in which the first priority is the equitable distribution (read redistribution) of money.

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.

While there is no relationship between top marginal tax rates and tax revenue, there is a very strong correlation between economic growth and tax revenue. Strong economic growth in the 1980-90s produced historically high levels of tax revenue, despite historically low tax rates.

So, if the president is really concerned about closing the deficit, he should now focus on how to get the federal government out of the way so that American businesses can thrive and our economy can grow instead of proposing yet another plan to soak the rich.

As Obama might say, it's simple math.

Rep. Mick Mulvaney, R-S.C., is a member of the Joint Economic Committee of Congress.

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