President Obama’s “Little Bit More”

In preparation for a talk to a group of financial people, I had to put together some numbers regarding President Obama’s “little bit more” that he has asked “the wealthiest among us” to pay. So I calculated the additional federal income taxes a high earner will pay in 2013 vs what one would have paid on the same income for 2012,

The increases are caused by 1) the increase in rates from the expiration of Bush era tax rates, and 2) the new 3.8% Obamacare tax on investment income of high income earners.

For someone making $1million, federal taxes go up by $55,700

For someone making $5million, federal taxes go up by $405,900

For someone making $10 million, federal taxes go up by $834,800

These numbers assume that the income is substantially all qualified dividends and long-term capital gains. But the increases are still approximately 90% of these amounts above if half of the income is earned income.

What’s worthwhile to note is that those numbers do not include anything from Obama’s budget proposal released last week. That proposal includes more hits to the wealthy, such as:

— implementing the “Buffett Rule” (which is no more than code for elimination of the special rate for qualified dividends and long-term capital gains)

— adding a 28% cap on tax deductions and other write-offs,

— adding a cap of $3 million on IRA and other tax-deferred retirement savings, and

— eliminating carried interest treatment for private equity, venture capital and other financial managers

Now, the president and his ardent supporters, such as Warren Buffet, Gene Sperling, Paul Krugman and other pseudo-economists, have repeatedly pushed forth the notion that the people who make America move financially — the investment bankers and equity partners — are all okay with having their taxes raised. And they further state that these substantial tax increases will not impact the amount that these individuals will invest.

Quite the contrary! I can tell you that with respect to my clients, there is a direct relationship between the amount of money they pay in taxes and the amount of money they invest.

My clients tend to invest the money left over after they have paid their (substantial) living costs and taxes. If taxes go up, the amount left to invest goes down.

There are those who will argue that “I don’t have $10 million or $5 million or even $1 million. Why should I care?” And “They have lots of money anyway — what’s the big deal?”

I submit to you that in making a decision as to whether to invest in a high risk start-up, whether as an individual or as a private equity decision-maker, the anticipated after-tax return is key. Higher tax rates therefore reduce the number of start-ups and other investments that get funded. The key to a healthy economy is investment, not consumptive spending. That is Economics IA. Hurt the investors, those with capital, and everyone is hurt.

One final thing to remember is the Obamacare effect. Remember, we were promised that Obamacare would not add one dollar to the deficit. Implicit in that was a multitude of new taxes such as the medical device tax of 2.3%.

The latest revised numbers from the CBO peg the costs of Obamacare to be $1.85 trillion through 2023. At the same time, the Heritage Foundation calculated that the 18 new taxes created for Obamacare would only raise $836 billion through that same period. Clearly, Obamacare is in a financial death spiral.

In sum, continuing to bleed the wealthy a “little bit more” (for Obamacare or other government spending) is only going to continue to hurt our economy. The problem with socialism is that we eventually run out of other people’s money.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *