Gregg Easterbrook

President Barack Obama wants to increase taxes on the wealthy, and surely is correct that this must be part of any serious plan to control the national debt. Consider the case of a wealthy couple who made $1.7 million in 2010, yet paid only 26.2 percent in federal income taxes — though the top rate supposedly is 35 percent, and the president says that figure should rise to 39.6 percent. The well-off couple in question is Barack and Michelle Obama, whose tax returns, just released, show they paid substantially less than the president says others should pay.

If Obama is in earnest about wanting increased taxes on the wealthy, then he should send the United States Treasury $182,998. That’s the difference between his Form 1040 Line 60 (“This is your total tax”) and what he would have owed at the higher rate (plus limits on itemized deductions) he himself advocates.

So why doesn’t he tax himself more? The Form 1040, after all, only stipulates the minimum tax an American must pay. More is always welcome. Obama should write a check to the United States Treasury for $182,998.

Wealthy people who say the rich should pay higher taxes — Bill Gates and Warren Buffett have joined Obama in declaring this — are free to tax themselves. If you believe the top rate should rise to 39.6 percent (Obama) or 50 percent (Buffett), then calculate the difference and send a check for that amount to the Treasury. Of course no one individual doing this, even a billionaire, would have much impact on the deficit. But if rich people who say they believe in higher taxes were willing to practice what they preach, this would prove their sincerity, making legislation on the point more likely.

“The most fortunate among us can afford to pay a little more,” President Obama said last week about debt and taxes. So why didn’t he? The president is covered by his own definition of “fortunate,” since his proposal calls for higher taxes on individuals earning more than $200,000 or couples earning more than $250,000.

Compared to the tax returns of the rich generally, the president and First Lady look good. They gave $245,000 to charity in 2010, or 14 percent of their income — admirable generosity, and a better number than posted by most recent presidents and vice-presidents.

Figures from the Internal Revenue Service show that in 2008, the most recent year for which statistics are available, the wealthy paid only about 17 percent of their income in federal taxes — less than the president’s 26 percent in 2010, and much less than the official top rate of 35 percent for the bulk of a well-off filer’s income.

That the wealthy as a group are paying 17 percent of their income as federal income taxes, down from 26 percent from the wealthy as a group in 1992, is a result of the tax cuts enacted under George W. Bush in 2001 and 2003, and extended under Obama last year.

The slashing of taxes for the wealthy is well-known — but Bush’s cut reduced taxes for typical people, too. The lower part of the rate structure is now so low that in 2008, 45 percent of American households paid no federal income taxes at all, according to the Tax Policy Center. Americans as a whole paid an average of just 9.2 percent of their income as federal income taxes.

Both figures are postwar lows. The Tea Party claim that federal taxes are rising is, simply, factually untrue.

Falling taxes for average people have played as much a role in the ballooning federal debt as have falling taxes for the rich. In turn, soaking the rich cannot, alone, tame the national-debt monster.

Calculations based on IRS figures suggest — only rough estimates are possible, as tax laws can change economic behavior — that raising the amount of income actually paid as taxes by the rich from the current 17 percent to 26 percent, what the Obamas paid, would bring in about $200 billion a year in fresh federal revenues. Increasing the figure to about 30 percent (likely actual result of the tax changes Obama advocates) would raise the new-revenue total to about $300 billion annually.

Such amounts would ease the deficit, but hardly represent a cure — government red ink is projected to hit $1.6 trillion this fiscal year. There simply isn’t a long-term deficit solution based only on taxing the rich. Social Security benefit cuts, and more taxes on the middle class, will be needed too.

Sustained 5-to-6 percent GDP growth would solve the deficit problem painlessly, by raising revenue without tax increases or Social Security cuts. While such growth, roughly double the current number, is possible, it seems unlikely.

Though tax increases alone cannot put the country’s fiscal house in order, the president should set a better example on his own tax returns.

That $245,000 the Obamas gave to charity, for example — deducting it on their Schedule A reduced their federal tax bill by roughly $85,000, and cut their Illinois state tax bill too. But you’re not required to deduct charitable giving, or to claim any tax favor. Deductions and tax credits are options. If you think the government deserves more of your income, don’t claim them.

Obama said last year that itemized deductions for the wealthy should be phased out — then on his own tax return, claimed a huge itemized deduction. Until those who advocate higher taxes for the well-off practice what they preach, the national debt situation may only get worse.

Bravely, international diplomats, United Nations officials and environmentalists are meeting in Cancun this week to demand that other people use less fossil fuel. Bravely they met in Copenhagen a year ago to make the same demand, after also bravely meeting in Bali, Montreal and similar resort locales in prior years.

I will skip the obvious point about the greenhouse gases emitted by the jets and limos that bring the participants to these annual confabs, where preaching-to-the-choir is the order of the day.

Most of what happens at the annual international conference on climate change has been decided on in advance, so the greenhouse emissions could be avoided by a tele-meeting. But then the delegates won’t get a paid trip to Cancun!

Last year, the majority of the world’s heads of state, including President Barack Obama, attended the climate change conference in Copenhagen, where they bravely made vague, nonbinding comments about how other people should use less fossil fuel.

Obama ended the conference by declaring the United States would make a nonbinding commitment to engage in future greenhouse gas negotiations — exactly what the elder president George Bush was mocked for saying at the conclusion of the 1992 Earth Summit, in Rio, a place the delegates bravely went.

Nearly two decades after Rio, nothing has changed in the international legal status of greenhouse gases, which are all but unregulated; nothing has changed in the United States, which does not regulate greenhouse gases; and President Obama was even using 17-year-old meaningless boilerplate!

Wait, the 2009 meeting did vote out this extremely vague, nonbinding document, whose only clear conclusion is that the United Nations and its member countries should continue to provide cushy jobs to the kinds of people who attend these kinds of conferences. Amorphous as the 2009 document was, only about half the heads of state present endorsed it. The rest just made hollow speeches then jetted away, after posing for pictures. But they posed bravely! It takes tremendous courage to stand in a fancy hotel in a beautiful locale and demand that other people use less fossil fuel.

This year’s conference may not even result in a vague nonbinding memo. Though there is sure to be lots of talk about … next year’s conference.

Perhaps you think I am mocking the Cancun event because I believe climate change to be inconsequential. Rather, I am mocking the Cancun conference because I believe climate change is a real threat.

Going-through-the-motions of international gatherings that accomplish nothing other than a luxurious week of travel for climate-o-crats are part of the problem. Such conferences make global warming concern seem the kind of thing only United Nations officials and environmental fundraisers care about. Having the United States president, and other heads of state, attend such conferences and then reach no agreement only makes the climate change concern seem ridiculous — as yet another self-promotion photo-op for politicians.

Greenhouse gases won’t cause the instant-doomsday calamities spoken of in Hollywood and environmental literature. But there is real risk climate change will harm agriculture, by altering rainfall patterns; will raise sea levels and change ocean currents; will reduce the global freshwater supply, by melting the snowpack and glaciers that provide most of the freshwater used for farming and drinking. Plus we should be reducing fossil fuel consumption regardless of climate trends.

The above paragraph contains ample rationale for action to reduce greenhouse gases. But wasteful international meetings in resort cites will not get this job done — no matter how fancy the chardonnay and canapés may be.

The United States should drop out of all international negotiations on greenhouse gases — such negotiations are a total waste of everyone’s time — and go it alone. Regulate carbon within the United States, on a domestic-policy basis. This will inspire U.S. engineers, inventors and business people to devise clever ways to reduce greenhouse gases cheaply. Once we invent them, we give them to the world.

That is how rapid global progress against smog and acid rain was achieved. The United States regulated these problems on a domestic-policy basis, invented cost-effective engineering and economic solutions, then gave the solutions away. Smog and acid rain are now declining almost everywhere in the world, even with population growth. Yet no international treaty governs these issues, and the United Nations has nothing to do with them.

International negotiation regarding greenhouse gases is not only complex, expensive and goin’ nowhere, there is no chance — none, zip, zilch — that the United States Senate ever will ratify a treaty that grants the international community decision-making input into American energy policy.

The Senate ratified the 1992 Framework Convention on Climate Change, under whose auspices the annual meetings are held. But the Framework Convention has no teeth — basically, it authorizes annual meetings. In 1997, a test vote on the Kyoto Protocol was rejected 97-0. Not even one Democrat voted in favor!

The current Kyoto Protocol is somewhat improved over the 1997 version – it might draw 15 or even 20 votes in the Senate. There is no chance — none, zero, zilch — that Kyoto or a hypothetical better-written Daughter of Kyoto will be ratified by the Senate. Not in the lifetime of anyone reading this column, at least.

So why does the White House and State Department continue to participate in climate change negotiations and send officials to conferences like Cancun to make empty speeches? In order to create the appearance of action, distracting attention from the lack of real change.

The cap-and-trade greenhouse legislation failed last year in Congress, and good riddance to the bill, which was ultra-complex, plus larded with bureaucracy and special-interest handouts.

The United States needs a carbon tax, the simplest and most cost-effective means to address greenhouse gases. Free-market economists such as N. Gregory Mankiw, head of the White House Council of Economic Advisors under George W. Bush, have endorsed a carbon tax — to inspire inventors and business people to seek profit by finding cost-effective ways to reduce greenhouse gases.

Right now Washington is debating raising taxes to fight national debt. Rather than tax labor or capital — all current proposals call for one or the other — let’s tax greenhouse gases. This will create a profit incentive to fix the global warming problem. Then we’ll give the solution to the world.

That’s American can-do spirit, and that’s what can protect us against climate change. Not conferences in Cancun.

Photo caption: A member of an environmental organization holds a sign during a protest outside the U.S. Embassy in San Salvador November 30, 2010, to demand that the U.S. sign the Kyoto treaty on climate change at the United Nations Climate Change Conference that is being held in Cancun, Mexico. The talks are seeking a successor for the U.N.’s 1997 Kyoto Protocol, which obliges almost 40 developed nations to cut greenhouse gas emissions by at least 5.2 percent below 1990 levels by 2008-2012. The U.S. never joined Kyoto, believing it would cost U.S. jobs and excluded developing nations. REUTERS/Luis Galdamez

Elizabeth Warren, just appointed a special advisor to President Barack Obama for consumer protection, says we are witnessing the “death of the middle class.” Slate’s Timothy Noah, a terrific writer and thinker, believes the rich are running away with the country. This new Census Bureau report, showing a nearly 5 percent decline in middle-class household income, received banner-headline treatment, with news stories suggesting typical people are being clobbered.

Middle-class life is the soul of the American experiment. Are things really so bad?

All the angst is focused on pretax income — not after tax.
Stated in today’s dollars, median household income was $45,000 in 1985, peaked at $52,500 in 2000 and is $50,000 now. (Absurd precision such as the “$46,269” median for 1991 doesn’t appeal to me.) Nearly all the decline from $52,500 to $50,000 has occurred since 2007 — that is, during a recession. Most likely that loss will bounce back.

But the key point is that the numbers in the Census Bureau report, and in nearly all alarmism about the middle class, are pre-tax income.

Federal income tax rates for the middle class were cut in 2001 and again in 2003. Because of the cuts, in 2000, 29 percent of American households paid no federal income taxes; today, 44 percent pay none. The result is that slightly lower middle-class incomes are being taxed less — and all that matters to the individual is buying power. The Tea Party crowd, which claims taxes are rising, doesn’t like to talk about the reality that taxes are falling. (Tax cuts, not spending increases, are the main reason for rising deficits.) The left doesn’t like to talk about after-tax income — only pre-tax numbers are used, because they’re the only numbers that are disturbing.

After-tax and adjusting for consumer prices, middle class household income is about the same today as a decade ago. That’s not fabulous — but it’s also not the emergency being claimed.

The angst also ignores rising benefits.
A generation ago, about 30 percent of Americans lived in a household where at least one member was drawing federal benefits — now 48 percent do.

In his important new book Rebound, Stephen Rose shows that when middle-class tax cuts, very low inflation, declining real-dollar prices in sectors such as food and electronics, and most of all rising government benefits are taken into account, most middle-class Americans are slightly better off than a decade ago. Nearly all are substantially better off than their parents.

Who is Rose, some Fox News apologist? He’s a labor economist at Georgetown University and a lifelong lefty. Rose has been taking a beating on the hard left for refusing to toe the party line. His work deserves wide attention.

Ever-rising federal benefits may be good or bad for the country’s fiscal management. In most cases, they smooth out income trends for the middle class, leaving most households about where they were previously. Warren, in my experience, doesn’t like to talk about rising benefits, because this subject undercuts alarmism (which can be used to rationalize more benefits).

Federal benefits to typical people are about to take a huge leap.
The new health care rules will function like an income-redistribution plan. The well-to-do will be taxed more, with the proceeds used to reduce health-care costs for average people. This is defensible as social justice. But it sure doesn’t jibe with the trendy notion of average people being shafted by the affluent: the Obama health care legislation represents a fantastic victory for average people over the affluent.

What if we’d done things differently?
Those who believe the middle class is being destroyed generally have two policy prescriptions: soak the rich, and stop globalization. Whether globalization even could be stopped now is far from clear. But if liberal international trade had never happened — say, tariff walls had been erected in the 1970s, a time Warren curiously depicts as the best-ever for the middle class — it’s likely typical people would be worse off today. Economic growth would have been lower, inflation surely higher: and inflation harms typical people more than stagnant wages.

Since roughly 1975, when middle-class income gains began to stagnate, lifespans have improved, material living standards have risen (safer cars, nearly universal air conditioning), education levels have gone up dramatically, women’s freedom and gay and minority rights have expanded — a lot of good things have happened for average people during a period that, to hear some talk, was dominated by a conspiracy against average people. Some conspiracy!

It’s true many European Union nations accomplished about the same with less increase in inequality. But since 1975, the United States has accommodated more than 40 million immigrants, allowing most to escape poverty, whereas European Union nations have accommodated less than a tenth as many immigrants in the same period. Which of the two regions has, in recent decades, produced the greatest good for the greatest number?

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.