JONATHAN CHAIT FEBRUARY 8, 2010
Glenn Hubbard, the former Chairman of the Council of Economic Advisors under George W. Bush, has an op-ed on the budget in today's Wall Street Journal. The good news is that, in addition to demanding spending cuts, Hubbard sorta-hypothetically concedes that tax increases might be needed. The bad news is that, like any good movement conservative, he insists such tax hikes must be regressive:
Our present income tax already relies very heavily on revenue from high earners; the top 1% pay well over one-third of federal income taxes. Mr. Obama's budget increases the reliance. But we cannot count "taxes on the rich" for deficit reduction, health-care expansion and funding entitlements while ignoring the effect of those tax increases on investment, innovation and growth.
To raise the revenue for the president's welfare-state ambitions, the tax increases must necessarily be broad-based, as, for example, with a broad-based consumption tax. A useful start would be to calculate—and present to the public each year—the broad-based consumption tax required to pay for higher spending.
Of course, he doesn't say "regressive." He says "broad-based," and suggests a consumption tax, which is regressive. Hubbard argues that the present system is so progressive that tax rates on the rich can't be raised any higher. The only fact he cites is the share of income taxes paid by the highest-earning 1% of taxpayers. But the income tax is just one part of the federal tax code -- payroll taxes, which are regressive, are the second largest source of federal receipts, and for most taxpayers, it's the largest source. And federal taxes are just one part of the American tax system -- state and local taxes raise a major share as well. What's more, Hubbard doesn't say what share of the total income that poor, poor top 1% is earning --that fact helps tell us what proportion of the tax burden they can bear.
Here is the total picture, courtesy of Citizens for Tax Justice:
Does this look like a system so progressive that it couldn't handle any more taxation at the top? No, not at all. It's a slightly redistributive system. The central goal of the conservative movement and the Republican Party for twenty years has been to reduce the progressivity of the tax code. At the national level, Republicans fight to make progressive taxes smaller and to shift more of the tax burden to the state level, which is regressive. At the state level, Republicans fight to make the tax burden more regressive and to shift the tax burden to the local level, which is more regressive still.
Now, it's probably true that future spending needs will require higher middle-class taxes in addition to higher taxes on the rich. But the notion that the system is maxed out on progressivity has no evidentiary basis. And introducing a significant new consumption tax as Hubbard proposes, without offsetting the impact, would make the American tax code regressive. Which probably suits Hubbard just fine.