We can, and we should, levy more from the rich

Robert Kuttner

October 16, 1990|By Robert Kuttner

ONE OF THE paralyzing myths of the budget debate is the claim that it is neither politically nor fiscally possible to balance the budget by restoring taxes on the rich. It is even sometimes claimed that if we confiscated all the private wealth of the richest Americans, that wouldn't entirely solve the budget crisis.

This is, of course, self-serving nonsense. For most of the postwar boom, when the economy was doing rather better than it is today, America's richest 10 percent of households paid taxes at a substantially higher rate than in 1990. If the distribution of the tax load were restored to roughly what it was before the supply-side revolution, that change, by itself, would meet the budget target.

According to a study by the late economist Joseph Pechman, perhaps the dean of America's scholarly tax reformers, the wealthiest 10 percent of Americans in 1966 paid federal, state and local taxes at a rate of 30 percent of their income. Today, they pay about 27 percent.

In 1966, the top 1 percent of households paid 39 percent of their income in taxes; today, they pay less than 27 percent, or about the same rate as the middle class.

The top 10 percent have about 36 percent of total national income, up from 32 percent pre-Reagan. If their income taxes were increased by three percentage points -- back to an effective rate of 30 percent -- that would increase revenues by over $300 billion over five years.

It is also worth recalling how recent is the idea that taxes on the affluent must be kept low. As recently as the early 1980s, the top bracket in the personal income tax was 50 percent. In 1985, Reagan officials at the Treasury Department thought themselves bold to propose a cut in the top rate to 35 percent. In 1986, however, Congress got caught up in the spirit of the moment, and cut the top marginal rate all the way to 28 percent.

How, specifically, should we go about restoring taxes? According to the Joint Tax Committee of Congress, a new 38 percent top bracket beginning at joint incomes of about $170,000 year by itself would raise $101 billion over four years -- and much more if the cutoff were set lower. We should also further cut back tax loopholes used mainly by the well-to-do.

In recent tax "reforms," ordinary people have been subjected to severe limits on what personal deductions they can take. You have to have astronomical medical expenses before they are deductible. Most casualty losses and interest on consumer credit are no longer deductible. This is, simply, a disguised tax increase.

Congress could limit the deductions that benefit mainly the wealthy, such as the mortgage deduction for second homes. Rep. Donald Pease, D-Ohio, has a good idea when he proposes a general formula to limit deductions on incomes over $100,000.

Congress should also give wage earners some long-overdue tax relief, as Sen. Pat Moynihan, D-N.Y., proposed when he called for a Social Security tax cut. The trouble with Moynihan's plan is that it failed to make up the lost revenue. But if we expanded the income base on which payroll taxes are collected, we could lower payroll tax rates, with no loss to the Social Security trust funds.

The budget package that Congress wisely rejected two weeks ago would have cut the deficit mainly by raising taxes on the working middle classes and on the sick, through Medicare benefit cuts. The middle class has taken an economic beating in the 1980s. If Congress is shrewd, it will hold to a very simple principle: Not another nickel of tax increases, or Medicare and Social Security cuts, for the middle class, until the well-off start paying their historic share.

Anybody who thinks there is a lack of great private wealth to tax need only take a drive through the suburbs, or peruse the advertising of America's upscale periodicals. Dostoevski wrote that to understand a society, you should look at its prisons. He might have added: Look at its schools, its emergency rooms, its soup kitchens. America in the 1980s has often operated as if the test of its worth were its shopping galleries and nouvelle cuisine restaurants.

It is also remarkable that Congress, especially its presumed liberal Democrats, is having such a hard time finding its way to a politics that insists that the middle class has been soaked enough. The explanation can no longer be the dazzle of Ronald Reagan, which has faded along with Reaganomics. It cannot be the prestige of George Bush, for the Bush presidency seems to becoming unstuck. It can only be the influence of political action committee (PAC) money and a loss of political principle.

Right now, the voters of middle income, middle America are profoundly alienated from politics. And rightly so. Any party that burns the middle class once again deserves whatever voter retaliation it gets.

And any party that wants to reclaim the affections of the middle class will have to earn it.

Robert Kuttner writes regularly on economic matters.

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