Taxing the rich: good policy, good politics

Thomas Schaller says it's time to raise taxes on the wealthy

April 05, 2011|By Thomas F. Schaller

If national Democrats and Republicans won't say it, if neither President Barack Obama (now officially declared for re-election) nor newly minted Speaker John Boehner (just four months after capturing the House gavel) will either, I guess I have to: It's time to raise income taxes, especially on the wealthiest.

America has deficit and long-term debt problems. Like any budget morass, there are two general categories of solutions — spend less or raise more. It's really that simple. These are not mutually exclusive choices; ideally, we can and should do both.

But as I explained in my previous column, despite the public outcry over rising deficits, opinion surveys show that Americans have little to no appetite for cutting spending on specific programs, except for a few small-budget items like foreign aid. So that leaves raising taxes.

I know all the arguments against raising taxes. Actually, they are variations on just one argument: Doing so will stifle the economy just when it is poised for recovery.

But if stimulating recovery is the goal, there are a number of ways the government can do that. When the Congressional Budget Office a year ago examined which among 11 possible governmental actions — including extending unemployment benefits, investing in infrastructure, issuing Social Security recipients an extra payment, raising business investment deductions, easing the Alternative Minimum Tax limit, and three variations on a payroll tax holiday — guess which option was deemed to be least stimulative?

You guessed it: cutting income taxes.

But even in normal times, don't higher tax rates for the wealthy slow economic growth? Nope.

Using Bureau of Economic Analysis data, the Congressional Research Service last October produced a report comparing economic performance from 1993 to 2000, under the tax policies enacted by George H.W. Bush and Bill Clinton, with 2003 to 2007 after two rounds of income tax cuts shepherded through Congress by George W. Bush.

The results? The gross domestic product growth rate during the first period was 3.9 percent but 2.7 percent in the second; median real household income growth in the first period was 1.7 percent but just 0.6 percent in the second; private-sector employment growth was 2.7 percent before the Bush 43 tax cuts, but it fell to 1.2 percent after.

And these data are for the most prosperous years of the Bush presidency, before the 2008 economic collapse. You'd think that making the argument that income tax cuts for the richest Americans fuels the economy would first require that the economy actually perform better when rates were lower. But apparently such logic only applies on Mars, or other places where one can't watch Fox News.

Still, isn't it unfair to soak the rich? Here's what to say to people who complain about policy unfairness: In the three decades since the 1980 Ronald Reagan-led tax revolution, only the top 20 percent of Americans realized net after-tax wealth gains. The bottom 80 percent have seen their inflation-adjusted incomes fall. If America is slouching toward socialism, it is a form of socialism in which tax law redistributes income upward, not downward.

What's most puzzling about the devotion to tax cuts no matter the economic situation is that raising taxes on the wealthiest is quite popular. Polls repeatedly show that a plurality if not majority of Americans support keeping current tax rates for middle-class Americans while letting the Bush-era tax cuts for the wealthiest expire and return to Clinton-era levels.

Had Mr. Obama let the tax cuts for the wealthiest expire, the government would have recovered about $36 billion in lost revenues this year. If that sounds like a drop in the pail, remember that after repeated promises made during last year's election to restore fiscal sanity, the new House Republican majority, fueled by the tea party revolutionaries, proposed a paltry $61 billion in new spending cuts.

So, to review: Raising taxes on the wealthiest won't lead to socialist redistribution, improves economic growth, is popular, and would reduce the deficit. Why, then, do politicians climb over each other to extend these tax cuts? Short answer: The wealthy exert disproportionate power in our political system. There's no other conclusion to reach.

As USA Today reported a year ago, America's tax burden is lower today than at any point since 1950. In the immediate aftermath of the economic crisis, keeping taxes low made sense; we were experiencing a financial meltdown caused by deregulation and greed, some of it fostered by the very people in the top income brackets who reaped millions if not billions along the way. But whether they were responsible or not, the vast majority of the nation's wealthiest citizens came out just fine on the other end of the 2008 economic crisis.

So it's time to raise tax rates to what they were a decade ago on those who have financially benefited the most during the past three decades. It will be good for the economy, good for the U.S. Treasury — and good politics, too.

Thomas F. Schaller teaches political science at UMBC. His column appears every other Wednesday in The Sun. His e-mail is schaller67@gmail.com.

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