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Why we need taxes

why we need taxes

Why we need to increase taxes on the rich

“President Obama announced plans Monday to fund his $447 billion jobs bill largely by raising taxes on wealthier families.”

Washington Post lead article on 9/13/2011

Bravo! It’s about time a national leader had the courage to use the T word. There is no solution to the federal debt fiasco that does not involve raising taxes on the well-off. Washington’s decade-long allergy to the word tax – or its reliance on silly euphemisms like “surcharge” or “revenue enhancement” – must end. Barack Obama did the country a service by putting this on the table.

Here’s the part the left will not like. Assume the president’s jobs bill is enacted, and is funded not by yet more borrowing but by raising taxes on the well-off. That will pretty much tap out “tax the rich” as a political strategy and rally cry. Unless the economy really takes off, further progress against the debt will need to come from entitlement cuts and raising taxes on the middle class.

Internal Revenue Service data show that in 1992, the effective federal income tax rate on the well-off was 26 percent. Today, after two tax cuts under George W. Bush, the effective rate is about 17 percent.

Obama’s latest proposal would raise the effective income rate on the affluent by about 2 percent. Bear in mind the ObamaCare legislation, most of which does not take effect until 2013 – just after Obama stands for reelection – already is scheduled to raise the effective tax rate on the well-off by about 4 percent. (I’m simplifying rates and policies that are designed to be incomprehensible.)

So suppose ObamaCare goes into law as planned, and the president gets his wish on the jobs bill. The effective federal tax rate on the well-off will rise 6 percent, from the current 17 percent to 23 percent. That’s almost what it was under Bill Clinton, before Bush the Younger began cutting taxes. Not much room left for “tax the rich” as the solution to ever-worsening government red ink.

And this would be before the new supercommittee acts, assuming it ever does. Raising taxes on the affluent to pay for the latest stimulus plan would nearly preclude the supercommittee from using this tactic as a main aspect of deficit reduction. The supercommittee would be forced to concentrate on entitlement cuts and middle-class taxes.

Currently, according to IRS data, about $2 trillion is earned

by those with incomes greater than $100,000. The current effective top-end tax rate of 17 percent yields about $340 billion. If that effective rate raises to 23 percent as Obama proposes, then the well-off would pay another $120 billion annually in federal taxes. That helps – and because everything helps, such tax increases must be done. But adding $120 billion a year to federal revenue is not going to solve a deficit projected to run above $1 trillion per annum indefinitely.

Suppose additional tax increases, such as the higher federal top rates President Obama has proposed, were enacted. Obama’s top-rate proposals would raise the effective rate on the affluent to around the 26 percent that Barack and Michelle Obama paid in 2010. That would add about $220 billion per year to federal revenue. Again a big help, but again not alone the solution to trillion-plus deficits.

Even a confiscatory Soak the Rich approach – raising the effect federal tax rate on the well-off to 50 percent – would max out at adding another $660 billion per year to federal revenue, against trillion-plus annual deficits projected out as far as anyone dares to think about this mess. And that’s assuming a Soak the Rich approach would not dampen the economy.

Requiring the well-off to pay more is a step that must be taken, and sooner the better. But unless the economy really booms, there is no scenario in which increased taxation on the affluent can, alone, fix the national debt. (This Tax Policy Center paper has details .) Entitlement cuts simply must happen, and higher taxes on the middle class may have to happen, too.

Bear in mind that while Bush the Younger’s two tax cuts were kind to millionaires, they also reduced income tax rates on the working class and middle class. Today, some 49 percent of Americans pay no federal income taxes at all. They benefit from the system, but pay in nothing. Small wonder that debt keeps getting worse.

Last December, the Deficit Commission found that higher taxes, entitlement cuts and economic growth are all required to deal with the national debt. There’s just no other way out.

So bravo for President Obama being honest about the need to raise taxes on the well-off. Let’s do this right away. And then let’s accept that entitlement cuts and other painful measures still will be needed. The politically palatable, relatively easy step of going after the affluent just doesn’t solve the problem.

Category: Taxes

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