The President’s Revenue Problem

February 23, 2015

Regular readers of this blog know the main issues with tax increases on investment income, like the capital gains and dividend tax hikes proposed recently by the President. This tax increase would be consistent with a general Obama administration philosophy of taxing returns on financial capital.

We usually write about the poor growth effects of such taxes in dynamic modeling, there’s another issue at play here worth talking about. And that issue is true regardless of whether or not one agrees with our dynamic modeling assumptions.

It’s popular to claim that you’ll fund a big new government program through a tax on investors. The strong ideological priors of the political press tell us that investors are earning huge amounts of money, and that’s where the income is.

But the math tells us otherwise. Here’s what the tax bases for wage income and capital income actually look like in practice, from my recent report on sources of personal income.

The issue is that the president has painted himself into an ideological and rhetorical trap.

Even in the “static scoring” world, where tax cuts don’t affect GDP, where capital gains taxes actually efficiently grab money from investors while somehow not reducing investment – they still just don’t raise much money.

The President has a broad progressive vision where he would like to have lots of federal revenue. But he’s committed to the politically-expedient vision of raising revenue from the small bar on the right, not the large bar on the left.

Progressives in America face a “trilemma” of sorts in budgeting. Ideally, they want revenue-neutrality, taxes only on capital, and large spending increases. But in real life, you can only pick, at most, two of these three things. The President has mostly stuck to the first two commitments, and often been forced to abandon the third.

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