Middle Class, Beware

by Joseph Sternberg

Federal expenditures have increased during President Obama's administration from a previous level of about 20% up to 25% of the Gross Domestic Product (GDP). This is an increase of $780 billion dollars a year. How is such an increase going to be paid for? 

Recently, President Obama submitted a budget for 2013 that calls for an increase of government expenditures, not a reduction, with a projected deficit of close to a trillion dollars. It is clear beyond any doubt that Obama is opposed to solving the debt problem by reducing expenditures. So what is the alternative?

Obama seeks to create the belief that if the rich paid their "fair share," there wouldn't be a deficit problem.There is a case to be made that the wealthy are not paying their "fair share." Over a long period of time, with both Republican and Democratic political support, the tax rate schedule has been progressive, calling for the wealthy to pay a larger percentage of their income in income taxes than less wealthy taxpayers. But because of all sorts of provisions and loopholes that have been written into the tax code, tax payments by the wealthy fall well below what is called for by the tax rate schedule. Obama proposes to fix this by imposing a millionaires tax of 30% so that wealthy people pay their "fair share." It is estimated that this would bring in an additional $40 billion dollars a year in revenue. That still leaves $740 billion in increased expenditures.

Obama says his objective is to protect the middle class from an increase in taxes while addressing the deficit problem. He has proposed to decrease the deficit by allowing the Bush tax cuts enacted in 2001 and 2003 to expire, claiming that these tax cuts were tax cuts for the wealthy and violated the "fair share" principle. The IRS tax data shows that this claim is false. According to the IRS tax data for 2000 and 2004, the income taxes paid on the total AGI  (Adjusted Gross Income) for all taxpayers fell from 15.26% in 2000 to 12.10% in 2004, a reduction of 21%. At the same time, the percentage of taxes paid on AGI by the top 1% of taxpayers only fell by 15%. So if the Bush tax laws are allowed to expire, the middle class will have their taxes raised more than the top 1% and the bulk of the increase in taxes will be paid by the middle class.

Since the total amount collected in federal income taxes in 2010 was approximately $900 billion dollars, an increase of 21% by canceling the Bush tax cuts would add an estimated $188 billion to federal revenue. Adding together $40 billion and $188 billion still leaves $552 billion in expenditures not covered by tax revenue. For political reasons (not to mention economic reasons) Obama isn't seeking an across the board increase in income tax rates to cover this deficit.

Well there is always a Value Added Tax (VAT)  to be considered. In the European Union the VAT tax produces about 25% of the total tax revenue. Overwhelmingly, the middle class pays for this expenditure tax since the middle class spends a much higher fraction of its income for consumption than the upper 1%. Federal revenue in 2010 was 2.16 trillion dollars. A VAT tax designed to add revenue equal to 25% of this amount would  provide $540 billion dollars covering the remaining deficit of $552 billion.

So the inevitable conclusion is that the increase in expenditures from 20% of GDP to 25% of GDP by Obama  would have to be mostly paid for by the middle class. Trying to conceal this by class warfare in unconscionable.
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Joseph Sternberg
Retired Professor of Physics
Naval Postgraduate School, Monterey, CA