Taxes should rise for most Americans

July 29, 2010

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.

For points that didn’t quite make the column and matters related to the BP oil spill and subsidizing electric cars, click here.

19 comments

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“tax increases and benefit cuts are the only ways to address record debt.”

100% agree. I think the benefit cuts should be passed first, as a sign of good faith.

Posted by drewbie | Report as abusive

Obama needs to jack up the taxes on Wall Street bonuses to 60%

http://storyburn.com

Posted by STORYBURN17 | Report as abusive

I think that as far as income taxes go, the gov’t can’t really go any higher; if any new taxes come about they should be consumption taxes. And of course spending cuts should be the real priority… starting with military. You quote the $549B in defense spending, but that DOESN’T include the price-tags for Iraq and Afghan believe it or not. Those have been filed under ‘special requests’ and add up to roughly $857B. $857B!!!!!! Since Iraq has a govt and it’s own army and police trained it’s time to get out, maybe save one operating oversees base and airstrip near Bhagdad that will be handed over in 10 years or so. Potential savings = roughly $350B. And as for Afghan – nothing more can be gained there unfortunately. Al Qaeda is not there anymore; the Taliban is the recognized gov’t in half the country; the Kharzai gov’t is completely and ruinously corrupt. These are people that don’t want our help and aren’t making use of it anyway. If America leaves, Pakistan, India, and Iran (and former Russian republics as well) will do more to solidify Afghan’s society through trade and dealings than military occupation by America ever could. Sorry America, no base there for you. Potential savings – roughly $440B. So that’s $790B savings, America gets a cushy base to keep pressure on Iran, and they let the world work on problems without America. THAT is a much safer world, one where many countries feel empowered to establish ties and effect (positive) change in their surroundings.
Sorry this turned into a military rant when this should be about taxes, but I think it’s important because nearly $1.4T is being spent on war and full-time soldiery and it’s ridiculous. America is NOT being threatened by any country; sure there are terrorist groups that would attack, but almost every developed country has to deal with that (even Canada had terrorist attacks in the 60s). It shouldn’t be such an outrage that the military take control of it… it’s a police and intelligence matter, not a $1.4T taxpayer problem.
Also, it’s worth noting that America’s military deterrent is much more potent when not entangled in petty Middle East conflicts. It seems clear that no mechanized army could possibly stand up to America’s army, that’s why guerilla model has been employed. Even still, casualties between combatants are still 5:1 enemies to Americans (10:1 if you include ‘collateral damage’, or innocent deaths). Not many countries that dislike America could survive those numbers, nor could they project military force on American territory, so it would be THEIR country being the warzone.

Posted by CDNrebel | Report as abusive

How can my taxes be raised? I am a one-income family and my property taxes are 20% of my gross pre-tax pay. I live in a rural community, we’re a farm actually, and I’m paying a tax to subsidize the subway rides of Manhattanites. Add to this 7% sales tax on nearly everything I buy plus State and Federal income taxes and Social Security. Plus I’m paying 10% of my gross income for health insurance. Your analysis does not indicate where I would find the money to pay more taxes. I suggest you write another piece and give some details on this.

Posted by bigturkey | Report as abusive

doesn’t Goldman Sachs and JP Morhan get enough of our money already?

Posted by nomas | Report as abusive

While I somewhat agree that taxes probably need to rise across the board, I think it’s dubious to ask people to pay into Social Security right now who have essentially no hope of collecting in the future.

Perhaps we should rethink the whole system, and cut war spending while we’re at it.

Also, Manhattanites do more to subsidize farming, on a magnitude of difference, than farmers ever do to subsidize manhattanites subway rides. (Let’s also be clear that riding a subway isn’t some luxury endeavor either…)

Posted by Hachiroku | Report as abusive

Taxes will absolutely have to rise, and services will absolutely have to be cut. I think there are some simple ways to close some of the gaps, but simple doesn’t at all mean easy.
1. Eliminate all government subsidies, period. This includes all agricultural subsidies, mining, energy, lumber, etc. All of it has to go – including the mortgage interest deduction which is a massive subsidy in and of itself.
2. Reduce the corporate tax rate from 35% to 10%. At the same time, eliminate the tax code complexity that allows the vast majority of profitable companies to pay no tax or even receive a benefit from the government.
3. Cut the defense budget to no more than $200 billion. Walk away from Afghanistan – we lost, get over it – and walk away from Iraq. Close all but a handful of foreign bases, keeping only those bases that allow the Navy to dominate the oceans.
4. Reduce personal income tax rates and move to a graduated flat tax. The complexity of the various tax codes is a hidden subsidy for the accounting industry, and is thus another economic stimulus program that needs to go. Tax incomes below a certain threshold at 5%, tax the top earners at 28%, with three or four steps between.
5. Create a 3% VAT and a tariff system, taxing goods made in countries that cheat in terms of world trade (yes, I’m talking about China) at 150% to 500% of nominal price.

This doesn’t solve all, or even most of our problems, but it’s a start.

Posted by JackMack | Report as abusive

Our government is on DRUGS. Really! It wants a “quick fix” for another temporary high! Serious now…give them just a little bit more “crack” and you will see, it will get better.

Scary, but our government is a crack whore, male or female, whatever gender you want.

3 issues to address:

A. Management and business process
Government is currently working on a non-functional and non-efficient (business model) with redundant programs.

B. Profits = Revenue – Expenses
If you cut the military expenses plus other governmental and financial black holes, profits for the country would be up. Military endeavors have bankrupted many nations.
Please refer to History lessons such as Louisiana Purchase (1803), Gadsden Purchase(1853), Germany and WWI, Russia and the Cold War, etc.

C. Leadership
Let’s have all of our leaders go through an intense accounting, marketing, business process, management, and logic educational courses. I would like to go as far as to propose a Competency Test for all leaders of state and federal positions. ( to be taken by all parties, left, right or in the middle)

Conclusion:
While sleeping with a whore is mandatory in our case, and sometimes enjoyable, let’s not give in to its gun threats to give her/him more crack a.k.a. taxes. Our crack prostitute of a government needs rehabilitation not another quick fix.

Posted by Viceroy1492 | Report as abusive

How about we start off by cutting government pay in half. Public servants shouldn’t be making millions milking their constituents. Cut those massive retirement benefits too. They can enjoy the public housing, medicaid, social security that they have set up for the rest of us paupers.

Posted by Trooth | Report as abusive

I would not give these idiots a penny more than they steal now. Just look at what they do with the money– are you that crazy to think if you give them more, they will be responsible with it? Perhaps you have forgotten this Country was created when we were overtaxed by a tyrannical Monarch? More taxes? I don’t think so.

Posted by harmonyaudio | Report as abusive

We shouldn’t even have an income tax. The vast majority of our forefathers believed an income tax was unconstitutional. It wasn’t until 1913 with the passage of the 16th amendment that income taxes were levied at all (Yes, I’m aware of the Revenue Act of 1861 which imposed a tax of 3% on top income earners to help pay for the Civil War). The Amendment was NOT ratified by 3/4 of the States in the Union, so it shouldn’t even be considered law. Actually, if you go out there and try to find the law that requires you to pay an income tax, you won’t find it…. it does not exist.

Posted by the_sconnie | Report as abusive

I would have thought by now that my fellow Americans would have gotten over their great “tax fear”! Low taxes are far more beneficial to those who earn the most; just look at the increasing concentration of wealth in the U.S. The idea that low taxes encourage investment in businesses that produce things and thus spread wealth through job creation unfortunately died about 25 years ago. Greed always enters the picture and current tax law does nothing to prevent it. Businesses and individuals keep more and more of the spoils for themselves while looking for new ways to increase their return by investing in vehicles that create no value for anyone else.

Posted by abkisa | Report as abusive

the other option (since our taxes are already approaching half when you consider state taxes, local taxes, property taxes, sales taxes.. etc)
is for government to reduce spending.
Much of the debt has been for arguably frivolous stuff.

Posted by Byron5 | Report as abusive

Yea ….raise MY taxes….a $35000 a year income citizen while the CEO of BP….the biggest oil spill in AMERICAN HISTORY GETS A MULTIMILLION PAYOUT!!!????!?!? FUCK YOU OBAMA….DO SOMETHING ABOUT THE CORRUPTION

Posted by Alias123 | Report as abusive

[...] more here: Taxes should rise for most Americans | Journalist Profile | Comments [...]

Obama, how does he have anything to do with Haywards parachute??? It is a british oil company, I am sure company’s of other countries give a rats behind what Obama thinks about their pay practices. Government cannot stop the pay packages what they can do is require moral hazard clawbacks which would entail escrow until say a decade passes after said CEO is out before they can tap into the fund. Of course their is not a business or business leader who would ever think that the corporate veil of protection should cost something!

Posted by jmjjmj1 | Report as abusive

[...] would kill any recovery, few dare utter an uncomfortable reality, according to Gregg Easterbrook: Taxes should rise for everyone, not just for the rich. Americans think they’re clobbered by onerous taxes, but U.S. taxes [...]

“Adjusting to today’s dollars, the United States has incurred more debt in the last decade than during the entire combined previous 211 years of the republic’s existence.”

Step one in reducing this mega-debt is to STOP selling bonds (printing $). China will continue to punch our pawn ticket as long as we keep renewing it.

Step two; a federal hiring freeze. More government jobs isn’t more jobs created nationally, it only digs the hole deeper. And the first rule of holes is “when you find you’re in one; stop digging.”

Step three; take Ireland as an example and institute a federal pay cut. In Ireland all government jobs take at least a 15% cut with their austerity measures. Excepting our armed forces (who are already supporting families with food stamps) all other US government employees should be able to deal with a 10% cut in pay. They already earn some 60%+ better than comparable jobs in the private sector.

Step four; take Russia’s example and sell off some national assets. Russia is only selling enough to retain controlling interest. There is plenty in this country which could be privatized.

Step five; put the US Congress on Social Security like Joe SixPack and watch the retirement program become quietly solvent. The practice of get-elected-once-get-paid-for-life is no longer sustainable; not to mention that our elected officials are NOT royalty.

Posted by PetePeterson | Report as abusive

“Taxes are relatively low in the U.S….” Author, you have no clue! For the amount of services provided and the lifestyle propagate in the U.S. taxes are onerous! Can you compare SS benefits or 401Ks with the european pensions and benefits? SO your solution is to raise taxes to EU levels, but WITHOUT the services people get there?!! This is purely insane, especially on top of what got the US into this place-fiscal easing and FED running wild with Keynesian pseudo-science!

Posted by pesheff | Report as abusive

For years now the middle class has cut back on buying and saving more.Now the rich are beginning to do the same.taxing the rich and middle class even more will make for even more saving and no spending. If everyone just saves their money how will money be put back into the system? By more bailouts? People do not have confidence in our governement. Why would the american people want to give even more of their hard earned money to a governing body that is out of control with spending? I associate government with the blob.. the more it eats the more it grows.

There needs to be a bill called the CLEAN UP GOVERNMENT ACT that cuts the pay of all politicians to the standards of average american people.

All congress needs to have their retirement reduced to the level of an average 401k.Their medical care needs to be to the level of an average american. Lets see how good retirement and health care would be then.

Posted by redrider140 | Report as abusive

[...] that if we want to keep spending at this rate, taxes will have to rise on everyone to pay for it. Greg Easterbrook says taxing the rich isn’t enough: Here’s the uncomfortable point few want to face: even if the rich do get hit with a federal [...]

Gregg, the median household income for the US in 2008 was $52,029, which is too far off from $68,000 to say they’re roughly the same.

Posted by jizoshula | Report as abusive