Apparently Obama did finally find something he believes in. After running a content-free campaign for much of the primary season, it appears that he has come out for soaking the rich. Of course, so has Clinton, so it doesn't exactly distinguish him.

Both Clinton and Obama have promised to cut taxes for those earning up to $200, 000 or $250,000  a year, increase spending on new programs, save all existing entitlement programs, rescue social security, and yet balance the budget. It may be just barely possible to do so, but I don't think it is likely. And the results would not be pretty.

Even if we assume that they confiscate every dime earned by those earning above $250,000 there is barley enough to even maintain social security, much less continue our other spending. And if we add universal health care and all the other promised spending, we could lower the bar considerably and still not balance the budget.

Using 2005 figures, it appears that the top 5% earned 22.2% of the aggregate income. As the lower limit of the top 5% was a household income of $166,000 the taxes proposed by Clinton and Obama would not even hit the full top 5%. But for now, let us assume the top 5% will be taxed more heavily. The national income in 2005 was $10,812 billion dollars. That means that the top 5% earned a total of $2,400 billion dollars, and the remaining 95% earned $8, 412 billion dollars.  Receipts in 2005 were $2,154 billion, so, if we assume that most of that was income taxation, it appears we capture now about 17-19% of income in taxation. Of course, as it is a graduated tax system already, I think it is safe to assume that a large part of that already comes from the upper 5%.  If we assume the proposed tax cuts are more symbolic than real, we can safely assume about a 16% aggregate tax rate on the lower 95%¹.

If we assume the income for 2009 will continue growing at a steady pace, let us say it will be $13,400 billion². If we assume our previous figures were correct, and the lower 95% will earn about 78% of that, they will earn $10, 450 billion. If the government captures around 16% of that, that will account for $1,672 billion of the federal budget. In 2009, it is estimated the budget outlays will be $2,905 billion. So even using a probably optimistic budget,  and assuming only current expenditures, we will need to capture $1,233 billion from the upper 5% of income earners. As they will likely be earning $2,950 billion, just to support the current budget that will require capturing 42% of their income³.

Now, recall that Obama and Clinton are not actually proposing taxing the top 5%, but only something like the top 3%, but for our purposes (and since I can't find numbers limited tot he top 3% on short notice), let us assume that they will reduce the threshold and tax the top 5% more heavily. even if they tax them so heavily they capture a full 75% of their income (highly unlikely), they would get a total of $2,200 billion. Of that, $1,233 would be required just to meet current budget needs, leaving them with just $967 billion for all their plans, from universal health care to keeping social security afloat.

Let us look at universal health care, as that is a big ticket item. I have seen estimates as absurdly low as $34 billion for the entire nation. But those are all based on unrealistic expectations⁴. I think a much more fair system would be to look at real life examples. For instance, Wisconsin's experiment cost $15.2 billion for a state with a population of under 6 million. Extrapolating to the United States, even if low-ball the number by figuring only 50 times as many people as Wisconsin, that gives us a cost of about $760 billion, which sounds a little closer to reality than the low estimates I have seen.

Which leaves our hypothetical Democrat budget $207 billion to shore up social security,  provide funds to expand existing entitlements, and pay for all their new spending.

Now, it is hard to say with certainty how much it would cost to save social security, but one plan that has relatively modest goals, and which seems to be a plan acceptable to Democrats, has a cost of $190 billion per year to build up a sufficient reserve against future bankruptcy. I  have seen some with higher numbers, but, barring a drastic increase in the retirement age, or the use of individual accounts, neither of which seem an option acceptable to the Democrats, I have not seen any with lower projections. So, let us say an addition $190 billion for social security.

So, after saving social security, instituting universal health care, and balancing the budget, our hypothetical budget has a total of $17 billion remaining for all the additional new projects they desire, as well as to increase spending on existing entitlements. Somehow I doubt that either Obama or Clinton could fulfill all their promised social spending outside of universal health care on a budget of $17 billion.

Of course, some will suggest that we can make up the difference by ending our involvement in Iraq.

Now, I am sure some will suggest that ending our involvement in Iraq will free up more than enough money to carry out all these plans. But just as spending the "peace dividend" did not cover all of Clinton's pet projects, and just left our military depleted, I am afraid spending the "cut and run dividend" will not suffice. Even those strongly opposed to the war, estimate only about $500 billion spent in the past 5 years. That amounts to maybe $100 billion, at most $150 billion⁵. Even if we saved $150 billion per year by abandoning Iraq (and that number is absurdly high), we would now have only $167 billion for all new spending outside of universal health care.

I suppose that makes it just barely possible for them to fulfill all of their election promises.

Then again, the way we got to that $167 billion remaining was a bit unrealistic, the methods I chose painted far too rosy a picture. As I pointed out, the Democrats are promising to hit only the top 3%, while I figured using the top 5%. And in addition, I also figured no substantial tax decrease on the rest, though the Democrats are promising real savings, so they would probably have even less money. And my assumption that they could extract 75% of income from the top 5% is just absurd, so the amount of money available would be even less than that.

In short, my numbers are far too favorable, and the truth is even worse for the Democrats. But that is not all. What none of this takes into account is that were the taxes on the upper 5% to almost double it would have a devastating effect on the economy, as money would be taken from investment and placed into the government. Yes, the money would eventually be spent by the state, or the state beneficiaries, but it would not likely have as much positive effect as explicit investment would. Most likely, the massive tax increase would have nothing but harmful effects on industrial and commercial growth.

So, if the Democrats even try to follow through on their promises to cut taxes for those earning less than $250,000 a year, while balancing the budget, protecting social security, keeping existing entitlements, and instituting new spending, they would have to capture 75% (or more) of the income of those earning more than $250,000, causing untold damage to the economy, and still they likely would have insufficient funds to pay for all the additional programs they have promised. Even if they extended the extremely heavy taxes from those earning over $250,000 to the entire upper 5% of wage earners, they would have only $167 billion for all new programs other than universal health care. That may be enough to do all they promised, barely, but at the expense of breaking one of their promises.

And should the economy take a turn for the worse, maybe because we are taxing the rich at 75% of gross income, the 2010 budget would not work even that well.

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1. This seems safe, as part of that money will go to those who pay no taxes. In addition, some of that income will go to tax deferred savings, or pretax spending for insurance, etc. In addition, the tax calculations exclude large chunks of that income, so the apparently low rate of 16% seems pretty accurate.

2. This seems a likely number. In 2005, income was 87% of GDP and in 2006 88%. If we accept the estimate of  $15,306 billion for GDP in FY2009, and figure income will be about 88% of that number, then income should be $13,400 billion.

3. As having the top 5% pay about 40% of the tax burden corresponds to figures I have seen elsewhere, this makes me much more confident in my approximations.

4. This number is based on what uninsured individuals spent out of pocket for health care. That's it. Which is an absurd assumption as it ignores that there will be overhead, that the uninsured often forgo treatment when they pay for it, but won't when it is free, that the amount of care demanded goes up when costs drop, and that it is unlikely the government will only cover the currently uninsured, but will also drag in some currently insured. In short, I think this number is absolutely meaningless as an estimate of costs.

5. As this site is very strongly opposed to the war in Iraq, I am sure they have included some ordinary military expenditures in these estimates, as well. So, in reality, if we withdrew from Iraq our savings probably would not even be as high as suggested.

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NOTE

This is a revised version. My original post used some incompatible numbers and I managed to switch some figures coming to an incorrect conclusion. This version uses corrected numbers.