Largely from raising other taxes: the ones that have the biggest impact on economic growth. Obama would let key parts of the Bush tax cuts expire, causing the top tax rate on ordinary income to go back to 39.6 percent, up from 35 percent today. The capital gains and dividend tax rates would rise to 20 percent from today's 15 percent. Obama might also impose Social Security tax at a rate of up to 4 percent on wages and self-employment income above $250,000, starting in 2019.And let's not forget that these are the people most likely to find a way to adjust their finances to minimize their tax burden. There is no way he'll garner the sorts of revenues that he imagines will come from these tax increases. Such tax increases never get as much revenue as their advocates predict. Then add in the effect on the overall economy and you can see that Obama's economic tax and spending plans just don't add up. Perhaps that is why Chuck Schumer is suddenly saying not so fast on instituting such tax increases.
These tax increases are not as bad as some Obama statements during the Democratic primaries suggested they would be, and they fall well short of what some of his conservative critics claim. For example, Obama does not propose to tax dividends at 40 percent or to impose the full 12.4 percent Social Security tax on high earners.
His real proposals, however, would still be plenty damaging. If rewards for America's entrepreneurs and firms are reduced through higher marginal tax rates, their incentives to earn, invest and create jobs will be diminished. Americans will have less incentive to save, and firms will have less incentive to pay dividends. Tax avoidance will become more profitable. A smaller capital stock will mean a less productive economy and lower wages for middle-class and other workers. These disincentive effects also mean that the revenue gain is likely to be smaller than Obama envisions.
As the Wall Street Journal writes today, Joe Biden's words yesterday in saying that the tax cuts would start for those earning less than $150,000 not Obama's words that they'll start at $250,000 hide the truth that he'll never be able to pay for his promises with just taxing the top 5%.
We suspect what's going on here is more than Mr. Biden's normal gift of gaffe. As with his admission that a President Obama would quickly be tested by our enemies, the Delaware rambler was stumbling into the truth. An Obama Administration couldn't possibly pay for a tax cut for 95% of Americans by raising taxes on a mere 5%. Those 5% don't make enough money, or at least they won't after they find ways to shelter more of their income when their tax rates rise.
Just as Bill Clinton promised a "middle-class tax cut" in 1992 only to raise taxes on the middle class in 1993, Mr. Obama will quickly find that his tax-revenue math doesn't add up. Add in the demands on Capitol Hill to spend more and to offset the Alternative Minimum Tax, and our bet is that even $150,000 would soon prove to be a moving tax target. Remember when the AMT was only supposed to hit 21 millionaires? Next year, without relief, it could hit 26 million taxpayers. Tax increases always hit the middle class because that's where the money is.