An opinion piece on WSJ called “The 2% Illusion” is quickly spreading through the blogosphere.

It argues that Obama will need tax increases on more than just “the rich” to fund new spendings and effectively cut the deficit in half as promised.

While the conclusion makes sense, the means for it were convoluted, if not misleading. The article starts with this:

On Tuesday, he left the impression that we need merely end “tax breaks for the wealthiest 2% of Americans”

The actual quote, however, was this:

In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans.

That “also” means ending tax breaks is *part* of the process, which included ending “education programs that don’t work”, “direct payments to large agribusiness that don’t need them”, and “no-bid contracts that have wasted billions in Iraq”.

Whether or not these measures are meaningless or a recipe for disaster, that’s a whole other topic. But there was never the impression that those tax breaks would be the only action needed.

The article continues with some crass arithmetical mistakes:

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 […].

But $1.3 trillion is their total adjusted gross income, which includes $350 million already paid in taxes (IRS spreadsheet here). The actual extra revenue would be less than $1 trillion, in 2006 dollars.

And this hypothetical extra revenue, taken solely from individual income taxes, should be compared against the deficit, not the overall budget. Individual income taxes already cover 45% of federal receipts.

In fact, this hypothetical extra revenue would cover more than half of the predicted $1.7 trillion deficit for 2010, thus fulfilling the promise of halving the deficit.

Of course, it’s an impossible hypothesis and the Laffer Curve would make sure no extra revenue would be earned. Yet, it brings up the point regarding the Conservative mantra preaching lower taxes will necessarily increase revenues. If anything, economic theory predicts a lower income tax rate will bring in more revenue if tax rates are already too high. In this already-too-high scenario, we would see new investments withheld or postponed because high taxation would be a disincentive. Is this the case today?

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