Obama's Payroll Tax Increase Affects Earners, Not 'Wealthy'; Media Clueless

If, as shown yesterday (at NewsBusters; at BizzyBlog), media reporters can't even get basic things like the fact that $1.74 x 3.5 doesn't equal anything close to $4 right, you would think that it's way too much to expect them to understand the difference between income and net worth.

You would be correct.

The coverage of last week's Social Security tax-increase proposal by Democrat Barack Obama included this representation by the candidate:

To extend the life of Social Security, Obama proposed applying a payroll tax to annual incomes above $250,000, affecting the wealthiest 3 percent of Americans. The Democrat also proposed eliminating income tax for any retiree making less than $50,000.

A targeted payroll tax such as the one the Illinois senator is proposing goes after the highest earners of salaries, wages, and self-employment income, who are often but nowhere near always among "the wealthiest 3 percent," at least some of whom receive all or almost all of their income from investments.

It's not surprising that Obama would make the obvious income/net worth error noted above, since, as I noted on Tuesday, he doesn't seem to even understand the difference between income and net worth. He told the same Columbus, Ohio audience that Warren Buffett had "income" of $56 billion, which is, of course, the Omaha investment legend's net worth. Buffett's total 2006 income of over $46 million is less than 1/1000th of his net worth, and the wage/salary component of his income is probably a small percentage of that $46 million. Oh well; focus groups probably don't mind going after someone's wealth as much as they would object to siphoning away that person's income.

It turns out that even the claim that "only" 3% are "affected" may also be a bogus.

I estimate, based on reviewing 2005 IRS data (Table 1.4, downloadable at this link) and 2006 Census Bureau information (Table AVG1, downloadable at this link), that the percentage of those "affected" (i.e., socked with a ginormous tax increase) is more correctly seen as about 2%.

There appear to be just about 3.0 million taxpayers who would be have to pay additional payroll taxes under Obama's proposal (some interpolation and inflation estimating was necessary to come up with this number). That 3 million would be:
- 3.3% of all taxable tax returns (90.6 million).
- 2.2% of all tax returns filed (134.4 million).
- 2.0% of all tax returns filed, plus an estimated 15 million (midpoint of the 10-20 million estimate here) legal nonfilers (149.4 million).
- 2.6% of all households, per the Census Bureau (114.4 million).

Which percentage should be used? I believe, unless you start adjusting for household or family size, that the 2.0% of all returns filed plus non-filers is the best approximation of all "Americans." I guess it all depends on what you mean by "affected" and "Americans." Maybe a reporter who reads this post might considering asking the candidate what he meant.

I have mixed feeling in bringing all of this up. The Obama campaign, once corrected, might decide that going after only 2% or so of Americans to further prop up everyone else instead of 3% isn't a bug, but is instead a feature.

Also open for discussion: What is a "retiree" for the purposes of Obama's $50,000 exemption from federal income tax? The answer is not as simple as you might think. Just for starters, are you a "retiree" if are 55, have officially retired from one company, and started work at another? If not, why not?

Cross-posted at BizzyBlog.com.

Taxes Economy Social Security