Plumbing the Numbers on Obama's Tax Hike

Senator Obama told Joe the Plumber that if Joe made more than $250,000, his taxes would go up by 3%. That money would then be redistributed to folks with lower incomes in the interest of "fairness." For the moment let's leave aside the "fairness" of the government taking money from people who are willing to work longer and harder than most in order to give it to people who perhaps aren't. (Yes, I know there are folks who work their tails off and just can't seem to get a break, just as there are folks who were in the right place at the right time and stumbled into a gold mine. Set that aside for now.)

What bugs me is this: if Obama is going to raise taxes on JUST the top 5% and give the money to the poor, how far will that really go? Will it really make a difference?

Being a lazy blogger unwilling to find undisputable, authoritative data via Google and Wikipedia, I'm gonna SWAG some numbers: There are about 300 million people in the US. Given the large number of kids and retirees, let's say that 1/3 of them earn income. (It keeps the math simple.) Obama is going to raise taxes by 3% on the top 5%, those making more than $250,000 a year. That's 5% of 100 million, or five million "rich" people who get to pay more taxes. (Note that this is Obama's definition of rich, not McCain's.)

Five million business owners and successful investors will get their taxes raised by 3%. What will that cost them? Well, obviously, it depends on how much they earn. But we want to keep this simple. We know that the very, very rich - the people who earn billions - manage to shelter and hide most if not all of this income from the taxman. And let's face it, there are darned few of them. The vast majority of those five million are small and medium sized businesses who have a handful to a few dozen employees. So let's pick a number, say, $500,000 to represent the average income for this group.
Obama's going to take an extra 3% from each of them. For every hundred bucks they earn, he takes $3. For every $100,000, he takes $3,000. So (taking an average) Obama is going to collect $15,000 a year from each of five million small business owners.

What will that cost them?
$15,000 is a year's wages for a person earning $7.50 an hour.
It's half the starting salary of a college-educated professional employee.
It's the cost of an advertising campaign that keeps a several marketing professionals employed for a month, and feeds business to printers, bulk-mailing service providers, newspapers, radio and TV stations, and so on.
It's two years' depreciation on a piece of capital equipment that will help a manufacturer compete against offshore companies with lower labor costs.
It's the cost of a year of college for their kid - or themselves.
$15,000 taken out of their pocket.

TIMES FIVE MILLION

What will that cost our economy?

But, but, but! Obama says. The money that the government takes will be used to Do Good! It will be redistibuted to the less-fortunate, to those who are unable (not to say unwilling) to earn those Richie-Rich (or upper-middle-class) incomes.

Okay.

I'm all for a social safety net. Again, leaving aside the "fairness" of the Robin Hood mentality, HOW MUCH GOOD WILL IT DO?

Five million taxpayers involuntarily contribute $15,000 each. That's $75 billion. Seventy-five billion dollars taken out of taxpayers pockets to be redistributed. $75 billion taken out of the economy.

How far will it go? Let's say that 10% of all Americans live below the line that Obama will draw. So ten percent of 300 million, or thirty million people, will get checks drawn on the Bank of the Upper Middle Class. Thirty million people will share $75 billion (this assumes zero cost to administer the program). (75*10^9)/(30*10^6) = (75/30)*(10^(9-6)) = 2.5*10^3.

Thirty million people get $2,500 each.

What can you do with $2500?

If you are a fiscally-responsible individual, you might spend it on...
Several months' rent in an apartment.
A couple of mortgage payments.
A couple of months of child care.
A few month's worth of groceries.
A semester or two of community college.
Downpayment on a halfway-decent used car, or cash for a "beater".

These are well and good things, but will they really make a fundamental change in someone's life? Yes, it'll help in the short run. And for some this would provide enough breathing room to get their legs under them. But for most folks living on the ragged edge, it's not really a game-changer. (I know; I've been there. It astonishing how far a thousand bucks doesn't go.)

However. I really hate to say this, because I know how it's gonna come across, but...

I've known folks who tend to make poor financial decisions (and therefore will never get into the middle of the middle class, much less the top). So I know that a good percentage of that thirty million will also decide that $2500 buys:

A hi-def TV
A good dirt bike
A killer stereo and light package for the car
Several months' worth of beer and smokes
A stack of lottery tickets
A "blow-the-wad" trip to the local casino

Call me classist if you wish, but I've LIVED with folks who make these sorts of buying decisions with much smaller windfalls. Folks who let the water or gas get turned off, but they pay the cable bill and keep the beer fridge full.

Yes, you could argue that the money is going back into the economy, stimulating "trickle-up" economic activity. But if we want to plow seventy five billion dollars into the economy, who do we want making the spending decision? People who have experience handling money? Or people who don't? People who are going to use it to pimp their ride, or to grow a business and create jobs?

Does it make sense to take $15,000 from a business owner and employer and divvy it up between six other people, none of whom have his business savvy, some of whom he wouldn't hire to sweep the floor? If YOU had $2500 just laying around to invest, would you rather give it to Trailer Park Tommy, or Joe the Plumber?

I dunno about you, but I'd go with the guy with the plunger.