President Obama’s tax offensive may be aimed at energizing his despondent base, but it’s also touching a nerve with the broader public. A new Gallup poll finds that Americans overwhelmingly (66 percent) back the president’s call to raise taxes on families making more than $250,000 and individuals making more than $200,000.
Evidently, you don’t have to be a European-style social democrat to believe that the rich should chip in more to help get federal deficits under control. Grover Norquist take note: We are all class warriors now.
Official statistics on incomes explain why. According to the Congressional Budget Office (CBO), the top 10 percent of earners on average have seen their income grow a whopping 106 percent since 1979. Over the same period, those in the middle and lowest quintile have experienced meager income growth of just 15 percent and 6 percent, respectively.
Moreover, IRS data show that the top 10 percent have received 42 percent of the total share of adjusted gross income earned between 1986 and 2008. Conservatives lament that high earners are also paying a higher share of their earnings in taxes. That’s true, but their income is growing faster than their tax burden. The share of income taxes paid by the top 10 percent increased by 28 percent from 1986 to 2008. (IRS tables)
In short, income gains over the past generation have been dramatically concentrated at the top. Modest increases in the tax burden borne by the top 1 or 2 percent of Americans will still leave them very well off compared to the rest of us. As President Obama has said, this isn’t class warfare so much as math.
But the math doesn’t tell us the best way to raise more revenue from the most affluent Americans. In thinking about this, progressives should keep two imperatives in mind. One is the need to make the tax code more pro-growth as well as more fair. The other is to make sure that tax reform advances the cause of debt reduction.
President Obama proposed on Sept. 19 to raise $1.5 trillion in new revenue as part of his plan to cut deficits by $3.3 trillion (not including the Iraq and Afghanistan draw down) over the next 10 years. His tax initiative has two main parts. First, it would cap the benefit from itemized deductions from 35 percent, the top marginal tax rate, to 28 percent for families with income of over $250,000 (200,000 for single-filers). This is not exactly a crushing new burden on the hapless rich. In fact, it would take us back to President Reagan’s 1986 tax reform, which dropped the top rate to 28 percent. The White House says limiting deductions in this way would raise $410 billion for closing federal deficits.
Second, the President’s plan would raise an additional $866 billion by allowing the Bush tax cuts to expire for high earners at the end of the year, while preserving them for middle class and low income families.
Both ideas are defensible on fairness grounds. But it’s not so clear that increasing income tax rates is the best place to look right now for more revenue. Politically, increases in marginal rates are probably a non-starter with most Congressional Republicans, who still genuflect to the supply side shrine. Even some Democrats, however, are leery about raising personal income tax rates in the midst of the current jobs crisis.
The alternative is the road taken by President Obama’s own Fiscal Commission. Its “modified zero plan” (analysed by Paul Weinstein and Marc Goldwein here) would raise $1.1 trillion over 10 years by eliminating or reducing tax expenditures. That’s a smaller number than the President’s. But most economists believe these backdoor spending programs introduce enormous complexity and distortions into the tax code. Curtailing them would promote economic efficiency and growth.
What’s more, the Commission’s plan uses the revenue to “buy down” both corporate and personal income tax rates, and to cut deficits. These rate cuts were crucial to attracting Republican support for a bipartisan compromise that combined tax reform and entitlement reform to reduce the debt by $4.2 trillion over 10 years.
This approach, also endorsed by the Senate’s Gang of Six, has one huge advantage over other tax reform schemes – it’s attracted bipartisan support. The President’s tax plan, on the other hand, seems calculated to embarrass Republicans rather than draw them toward a “grand bargain” on debt reduction.
In any case, the fiscal commission’s plan doesn’t just pinch the rich, although they benefit disproportionately from tax expenditures and loopholes. It also hits many middle class recipients of tax subsidies like the mortgage interest deduction and the exclusion for employer-paid health plans. As appealing as it is to insist that the rich pony up more to solve the debt crisis, there are practical limits from how much we can squeeze from high earners. In truth, our fiscal chasm is so deep that middle class taxpayers will have to up their contribution as well. Otherwise, we will have to make unacceptably deep cuts in domestic and entitlement spending to get the debt under control.
So by all means, let’s ask the wealthy to chip in more. But let’s also keep in mind that soaking the rich, by itself, won’t restore fiscal responsibility in Washington.
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