Given all the rhetoric coming from the President Obama over the past year, one might be excused if they believed that the impending fiscal cliff largely impacted upper income individuals. Reality is a cruel mistress, it turns out.
A recent New York Times article gives a breakdown of the various taxes involved in the fiscal cliff. From reading over this, it becomes obvious that the vast majority of tax increases would hit the middle class. The chart below provides a breakdown.
(click on chart to enlarge it.)
If you prefer this in pie chart form, you are in luck:
If we break these taxes down by which groups they will impact, I come up with these results.
This does not paint a rosy picture of the “fiscal cliff” at all. Indeed, only 9.8% of the projected revenue in the “fiscal cliff” seem to definitively impact upper income earners. There are three groups of taxes cited above that might impact various groups: the estate tax, Obamacare taxes, and “short-term breaks.”
The estate tax would at least, on the face of it, seem to impact upper income earners more. The Obamacare taxes are a mixed bag, and the short-term breaks I’m not totally sure about, but I’d wager to guess that a significant bit of those hit the middle class, as well.
An educated guess here would suggest that about 75% of the taxes in the fiscal cliff will hit lower and middle income earners, while the other 25% would hit the upper class. This makes suggestions by left-wing political pundits such as Paul Krugman to “not make a deal” seem all the more asinine.
It also emphasizes the lack of realism inherent in the President’s position. Even with significant tax increases on upper income earners, it looks like, at best the Administration can increase tax revenues by maybe $130 billion. The current budget deficit is $1.1 trillion (with a “T”). That means if we enacted on the taxes on the wealthy, we’d only cut the budget deficit by 11%, and even that is based on optimistic assumptions about future growth. In reality, by raising taxes, we might undercut growth and put ourselves in a worse position long-term.
What all this suggests is that there is no way to fix America’s fiscal mess without deep reforms. We have to cut military spending, we have to reform Medicare, Medicaid, and Social Security. If we wanted to be particularly smart about this, we could also stand to simplify the tax code by lowering rates, but eliminating deductions, as well. We also need to make our economy more competitive, and measures such as Obamacare and Dodd-Frank certainly aren’t helping.
There’s no way to tax our way out of the mess and even the significant tax increases in the fiscal cliff, which would harm the middle class significantly, would likely not even half the budget deficit. Significant reform in our spending habits is the only way out.