Taxes should rise for most Americans
The fight over whether to let tax cuts enacted under George W. Bush expire at the end of 2010 is being waged in terms of political sloganeering — “taxes are an outrage” versus “the rich must pay.”
Here’s the uncomfortable point few want to face: even if the rich do get hit with a federal income tax increase, the middle class must bear much of the cost of fixing America’s budget-deficit mess. Taxes should rise, not just for the rich, but for most Americans.
The current fiscal year federal deficit is running at $1.4 trillion; the outlook is for year after year of very high deficits, and this is before the Baby Boomers retire. Adjusting to today’s dollars, the United States has incurred more debt in the last decade then during the entire combined previous 211 years of the republic’s existence. Unless economic growth rises to about five percent per year and stays there for some time — which is possible, but not likely — tax increases and benefit cuts are the only ways to address record debt.
We’d all like to think that soaking the rich solves the problem, but it doesn’t. Bush’s tax cuts, due to expire on December 31, cut the federal income tax top rate to 36 percent from 40 percent. Suppose the top rate is allowed to return to 40 percent, as your columnist thinks it should. Other things being equal, that would raise federal revenues about $65 billion per annum. While we’re at it, let’s shave 10 percent off the $549 billion fiscal 2011 defense budget request, saving another $55 billion.
Now we’ve taken the only steps that are politically palatable — taxed the rich, cut the Pentagon. That reduces the deficit for fiscal 2011 by about $120 billion, of a projected $1.1 trillion deficit. The deficit would still be about a trillion dollars – just five years ago, this would have been considered an unthinkable level of debt.
Run the federal income tax rate up to 50 percent for top earners — anything more is confiscatory, considering state and local taxes must be added — and the rich will pay another $200 billion or so next year. That’s still not enough to narrow the deficit.
What happens if most George W. Bush tax cuts for the middle class are allowed to expire? The middle class pays about $150 billion more next year. All three bullets must be bitten — soak the rich, increase taxes on the middle class and cut the Pentagon — to reduce the 2011 deficit by close to half. (Unless the economy really starts to roar, in which case higher revenues come to the rescue.)
Tea Party types may shake their fists about federal taxes, and ice-cream sellers may ask Joe Biden why taxes haven’t been cut — but the reality is that federal income taxes fell dramatically during the last decade. Americans appear to believe taxes are onerously high. Actually, taxes are down, for almost everyone. Rising national debt links more closely to tax cuts than to federal spending, since spending actually has gone down slightly in recent months, as well.
Bush’s tax cuts reduced the federal income tax rates paid by the middle class by three percent, to 25 percent from 28 percent, for most middle class filers. Bush’s cuts essentially ended federal income taxes for anyone earning less than $68,000, which is roughly the median household income — people earning less than $68,000 still pay Social Security and Medicare taxes — and also made credits for dependents and childcare more generous, which helps average people more than it helps the affluent.
Americans want to believe we are being clobbered, just clobbered, by onerous taxes. Here’s the comparison to the rest of the world — U.S. taxes are relatively low. Low taxes are wonderful, and a reason the United States is strong and free. Low taxes also are a reason the national debt is at runaway levels.
The middle class must not be “sacrosanct” when it comes to deficit reduction, House Majority Leader Steny Hoyer said last month at a meeting of Third Way. Hoyer is the very embodiment of establishment Democratic thinking, while Third Way is rapidly emerging as Washington’s most important beyond-ideology think tank. If getting past traditional soak-the-rich rhetoric is what’s on the table at such a meeting, then the political landscape may be shifting.
As the Bush tax cuts for the well-to-do expire, somewhat higher taxes for the middle class are needed, too. Unless you’d rather reduce Social Security benefits, of course.