Using Obama's Senior Staff To Undercut His Tax The Rich Insanity

Before we do today's post, let me set some personal background:

1. I am not what the typical American would consider rich.
2. I drive an eight year old car and my wife drives a six year old car, neither of which cost us over $22,000 when we bought them.
3. We live in a typical American, suburban, 2,000 square foot home.
4. We do not take exotic vacations to far away places.
5. We do not own a boat (or yacht).
6. We do not own second and third homes in far away exotic places.
7. Our marginal income tax bracket in 2011 was 15%.

Thus, I personally have nothing at stake when discussing whether the rich in this country should pay more in taxes. All of the plans the President has proposed under his tax the rich class warfare will not directly affect my household.

As we have done many times in this blog, let's quickly review how the Washington political class wastes hundreds of billions of dollars a year:

• Unbiased, nonpartisan estimates put the annual waste and criminal fraud in the Medicare and Medicaid Federal programs at anywhere from $110 to $150 billion a year.
• Unbiased, nonpartisan estimates put the annual waste and criminal fraud in the Social Security system at about $100 billion a year.
• The Federal government has admitted that just one of its unemployment benefits program probably loses $17 billion a year to fraud.
• The IRS has admitted that it fails to collect upwards of $380 billion a year owed to it under the current tax code but unpaid by tax evaders.
• If the Federal food stamp program wastes money at the same rate of other Federal programs than about $7 billion a year of taxpayer wealth is lost via fraud in this program.
• Total waste just from these few Federal efforts: $515 - $545 billion dollars a year.

Thus, without going into other areas of Federal government waste (e.g. defense spending, overstaffing, bad contracting, etc.), we can easily see that the Federal bureaucracy conservatively wastes over $500 billion a year. This comes out to about $4,300 for every U.S. household every year. I am sure that every one of those households would like to see their household income increased $4,300 every year without suffering any cut back in government services if only the Washington political class ran a tighter ship.

This $500 billion annual waste is why no American, rich or poor, at this point in time should be required to pay another penny in Federal taxes. There is more than enough wealth go around, it is just that our Federal politicians waste so much of it.

But that is not how Obama sees it. It wants the higher earners in this country to pay more and more in Federal taxes even though these same earners already pay for a massive amount of the Federal bureaucracy, both in total dollars and as a percentage of total dollars. Their average percentage of income sent to Washington as taxes looks like the following distribution according to actual IRS tax return data (click on the chart for a larger view):

Consider the two tax the rich schemes that Obama has proposed:

1. In one scheme, Americans earning over $1,000,000 a year would pay more in taxes. This scheme would net the Federal government about $4.9 billion more a year in taxes. This is less than 1% of the annual amount that Washington wastes in current Federal programs. This will virtually no impact on making other Americans' lives better, reducing our national debt, or closing our annual deficits, considering the fact that the Obama administration is running deficits of voer $1 TRILLION every year.
2. In his other scheme, those Americans earning over $250,000 would pay more in taxes. This would generate about $70 billion more a year in taxes for the Federal government, only about 14% of the annual amount wasted every year. Even this $70 billion a year is only about 6% of an average Obama annual spending deficit so even this higher tax plan would do little to fix the financial state of the country.

The bottom line is that Obama and the rest of Washington's political class could get so much better returns if they focused on just plugging the leaks in current government spending rather than waste time and do all of this political posturing over taxing the rich. In addition, I would think that keeping more money available circulating in our weakening economy, either $4.9 billion or $70 billion, is a better use of this wealth than sending into the black hole of Washington. Obama said the exactly same thing several years ago in 2009: http://townhall.com/tipsheet/katiepavlich/2012/07/10/obama_flashback_last_thing_you_want_in_recession_is_to_raise_taxes

Okay, this is all a long winded set up to using Obama's staff as an example of why these are stupid tax plans. Consider the research and analysis that the Washington Free Beacon printed on July 10, 2012 (http://freebeacon.com/obamas-millionaires/):

• All of the information from the article are sourced back to the official White House website on White House staff salaries or to the original financial disclosure forms that White House personnel are required to file under law.
• Thus, a reader can verify that the Beacon article is based on official government documents and not speculation.
• According to the article, White House Communications Director Dan Pfeiffer, Press Secretary Jay Carney, Cabinet Secretary Chrisopher Lu, and senior advisers David Plouffe and Valerie Jarrett all earn the maximum White House salary of $172,200 per year.
• This top salary band places them well under the two potential tax the rich thresholds that Obama would like to see implemented, either $250,000 or $1 million, but in the upper 5% of all American wage earners.
• However, the Beacon reports, based on their own personal financial disclosure records, Jarrett’s net worth is between $3.3 million and $13 million. Lu is worth between $2.3 million and $5.2 million, Plouffe is worth as much as $3.6 million, Carney as much as $3.2 million, and Pfeiffer as much as $2.1 million.

Interesting stuff. Now consider a struggling business owner who is trying to get his or her business into a growth mode. They have thrown their life savings into this endeavor. They are trying to contribute to society by producing a worthwhile service or product. Let's assume that they are like thousands and thousands of other small businesses and they file their business and personal income tax returns together because that is the easiest and most advantageous approach for them. 

If they are like many small business earners, they have made tremendous personal sacrifices over the past few years, according to a recent Citibank survey of small business owners: 

“Keeping businesses afloat has required sacrifices on the part of both employer and employees, the survey found. Over the past few years, business owners report that they have, at one time or another, taken less profit (78 percent), worked more hours than usual (70 percent), and used their own money to help the business survive (69 percent).

“But what is most revealing is that the majority of respondents — 54 percent — say they have gone without a paycheck in order to keep the business running. And nearly one-quarter (23 percent) have gone without pay for one year or more.

Employees, too, sacrificed finances for their employers. More than one-third of owners (38 percent) said their employees worked overtime without pay; 18 percent said employees either missed paychecks or had paychecks delayed.” (see this CNBC report for the details: http://www.cnbc.com/id/47723383.)

Times are certainly tough and challenging for America's small business owners.

But let's assume that theoretical small business has gotten their business income up to $400,000 a year. Under Obama's second, and probably preferred tax the rich scheme, this business owner would likely now have to pay additional taxes on about $150,000 of his or her annual income stream.

These are additional taxes that cannot be used to expand the business. These are additional taxes that cannot be used to expand hiring or give additional benefits to employees. These are additional taxes that the small business owner will never see any advantage of paying.

And the ironic thing is that the millionaires sitting on Obama's staff, people that are financially far better off than thousands and thousands of struggling small business owners, people that have already made their fortunes and currently enjoy high salaries and outstanding benefits, will not be impacted at all. Does not seem "fair" or good economic policy to me.

Another example. Consider someone who has a net worth of $6,000,000. They have invested all of their worth in tax free municipal bonds that earn them a return of about 4% a year, tax free. Thus, they annually earn $250,000 a year but will not be paying any more in taxes. The hypothetical small business owner we created above would be paying more in taxes even though their personal and business wealth is likely far below this individual's $6 million personal wealth.

And that is the fallacy of Obama's tax the rich scheme. He wants to increase taxes on current high earners, as he defines them, which may not translate into taxes on the wealthy, as proven by our sample municipal bond investor and many on Obama's staff. Thus, he will be helping to cripple America's job creation machinery, small businesses, without any discernible impact on the economy, our national debt, or out annual spending deficit by the Federal government.

But this type of short sighted, self defeating is typical of most politicians including the President:

• Rather than do the nitty gritty work of coming come up with a coherent, fair, and economically favorable tax code overhaul, let's just tax more Americans in a helter skelter manner.
• Rather than do the nitty gritty work of coming up with a coherent, fair, and effective national energy strategy and policy, let's just throw around billions of taxpayer dollars in a helter skelter manner to near bankrupt alternative energy companies (Solyndra, Beacon, Spectra, A123, Ener1, etc.) and see what sticks, if anything.
• Rather than do the nitty gritty work of cleaning up the waste, inefficiencies, and criminal fraud that is rampant throughout every Federal bureaucracy and saving hundreds of billions of dollars in the process, let's just expand those programs to cover the shortfall of waste and tax Americans more to cover the incompetence.
• Rather than do the nitty gritty work of understanding the root causes of our escalating health care costs, let's just put another massive Federal bureaucracy in place and implement about two dozen additional taxes to pay for it without understanding how to address and resolve the underlying root causes.

Which I guess is the root causes of our problems with government and the politicians that operate it. They are unwilling, unable, or too distracted worrying about their reelection or personal enrichment to do the nitty gritty work of governing. Maybe that is why major issues never get resolved, our tax burden continues to increase, and our national debt burden is skyrocketing, not only for current generations of Americans but future generations also.

Thus, the next time you hear that the President wants to raise taxes on the rich to make our tax system "fair", remember that he is not necessarily talking about taxing the wealthy, he is talking about taxing current "high" earners. Current earners that are struggling to create viable businesses and the economic growth and jobs growth that comes with it.

Many wealthy Americans, including a lot of Obama's staff are wealthy but not current high earners, under his definition. They already made their wealth and Obama's short sighted tax the rich schemes will exempt them while penalizing the job engines of small businesses. 

It makes you wonder if Apple would still be one of the largest companies in the world from a valuation perspective if Wozniak and Jobs had been considered wealthy, under Obama's definition a few decades ago. They may have been required to pay more in taxes, under Obama's tax the rich scheme, for little in return, when they were still working out of their garages. How many potential Apple-like small business owners are working out of their garages today and will see their potential to grow hamstrung by a shortsighted and misleading tax the rich scheme?

We may never know but we do know that it is unnecessary, given the disgraceful level of government wasteful spending that goes on today.

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As far as the nitty gritty of running a government, a concept that seems foreign and undoable to many of today's politicians, may I recommend the following links to them for a starting point of actually running a viable, cost effective organization:

Revising the tax code: http://www.loathemygovernment.blogspot.com/2012/02/united-states-of-purple-fixing-our.html

Implementing a coherent national energy strategy: http://www.loathemygovernment.blogspot.com/2012/02/united-states-of-purple-presidency_09.html

Resolving our escalating health care cost issues: http://www.loathemygovernment.blogspot.com/2012/02/united-states-of-purple-solving-our_12.html

Saving the fiscal solvency of Social Security: http://loathemygovernment.blogspot.com/2012/02/united-states-of-purple-saving-social.html



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