PLANK JULY 12, 2012
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President Obama wants to extend the Bush income-tax cuts, but only on family income up to $250,000 per year. Mitt Romney wants to keep the Bush tax cuts for everybody and to further lower all existing income-tax rates by 20 percent. They're both wrong.
Romney is a lot more wrong than Obama, because his plan is very regressive. Romney would drop an already too-low top marginal rate of 35 percent down to 28 percent. He would also eliminate the alternative minimum (income) tax, the inheritance tax, and (for families earning less than $200,000) all existing taxes on interest, dividends, and capital gains. According to the nonprofit Tax Policy Center, Romney's tax proposals would add $900 billion to the deficit in 2015 (or $480 billion if you assume all the Bush tax cuts were going to remain in place anyway). So Romney's plan is terrible from a deficit-hawk point of view, too. (Romney says he'd make up lost revenue by eliminating tax loopholes, but since he won't specify which ones he'd eliminate, we have to assume that's hot air.)
Obama's tax plan has the virtue of being progressive—the White House says only the top 2 percent will see their taxes rise—and it will cost the Treasury a lot less in forgone revenue—about $150 billion in 2013 (though Bob McIntyre of Citizens For Tax Justice says a more accurate price tag is $243 billion if you also include Obama's proposed extension of existing temporary reductions in the alternative minimum tax and the estate tax). The Obama plan also has the virtue of lasting one year. After that, in the absence of congressional action, the Bush tax cuts would expire. Given the current weak recovery, a temporary extension of the Bush tax cuts for those most likely to spend the money (i.e., the non-rich) is a probably good idea.
Eventually, though, income tax rates need to return across the board to the Clinton-era levels. "I don't want to raise taxes on the middle class," Obama says. But if he doesn't, he can forget about achieving meaningful deficit reduction. Taxes need to rise for the rich —and I'd argue they should rise a lot higher than to a top marginal rate of 39.6 percent. (I'd create three additional brackets for incomes above $1 million, $10 million, and $20 million, and have the marginal tax rate rise gradually from 39.6 percent to 70 percent, which is what it was when Ronald Reagan came into office.) But once it's established that the rich will pay their fair share, taxes on the middle class ought to rise, too.
It would be political suicide for Obama to say any of this right now, because voters think taxes are already too high. But federal tax rates are not too high at all; they're at historic lows. A new Congressional Budget Office report, which examines the impact of all federal taxes (including the progressive income tax and the ever-rising regressive payroll tax) says the average effective tax rate for all households (i.e., the percentage of total income, including federal benefits, that a household pays in all federal taxes) was 17.4 percent as of 2009, the last year for which data are available. That's the lowest effective tax rate recorded since 1979, and if the IRS had effective tax rate data going further back it would be the lowest since a lot earlier than that. (Effective taxes were comparatively high in 1979.) Since 1979, the average effective tax rate has fallen for all five income quintiles (i.e., the lowest, second-lowest, middle, second-highest, and highest 20 percent). For the middle quintile, which represents the dead center of the middle class, average effective tax rates dropped from 18.9 percent in 1979 to 11.1 percent in 2009.
Surprisingly, the federal income tax is slightly more progressive today than it was in 1979, despite a precipitous drop in top marginal rates. That's because the effective income tax rate dropped more precipitously at the bottom than at the top. Republicans sometimes complain that we need to hike taxes on the poor, which is both barbaric and a betrayal of previous conservative doctrine (propounded by Ronald Reagan, among others), which called for helping the "deserving" working poor through tax cuts rather than helping the "undeserving" non-working poor through welfare benefits. New GOP doctrine says that all poor people are undeserving, whether they work or not.
Taxes should not rise on the poor, and they should rise a lot on the affluent. But they need to rise on the middle class, too. They probably shouldn't rise too soon, given the state of the economy. But if Obama gets a second term, he'll have to get over his aversion to raising taxes on the middle class. The past three decades have been rough on the middle class in all sorts of ways—I just published a book about that—but not when it comes to taxation. Their taxes have fallen and now the country is broke.
Correction, 7/13: An earlier version of this item said, of Obama's proposed partial extension of the Bush tax cuts, that only the top 2 percent "will see their incomes rise," according to the White House. I meant "taxes," not "incomes." It's fixed now.
15 comments
I'd argue they should rise a lot higher than to a top marginal rate of 39.6 percent. (I'd create three additional brackets for incomes above $1 million, $10 million, and $20 million, and have the marginal tax rate rise gradually from 39.6 percent to 70 percent, which is what it was when Ronald Reagan came into office.) Well, if you must argue; you will have to do it with somone else, because I agree with you.
- Nusholtz
July 12, 2012 at 4:40pm
I agree, too. Somewhere (I can't remember where) I came across a website that argued that increasing taxes would increase economic activity and employment. Anyway, the Clinton era argument suffices--the Democrats traised taxes then and ushered in high growth. What I find infuriating is the GOP/tea party argument that essentially says the government takes tax revenue and then just buries it at the bottom of the sea, thus depressing GDP and employment. Doesn't the government purchase goods and services with the money, employing people for specific purposes, whether it's building interstate highways or doing research that leads to the internet? Both huge success stories, obviously. My household income is around 200K. I say raise my taxes now, although for starters I'll take Obama's proposal.
- ballston
July 12, 2012 at 4:51pm
ballston Taxes cause deadweight loss. In every Econ 101 ever published. Deadweight is bad. And your examples are confused. Interstate highway was originated by Defense Department --- no one is arguing the role Gov should play in defense. Arpanet as well. And I love this notion of fair share. Can moonbats do math? Do they think the figures below indicate the productive private sector type are not paying their fair share? IRS figures show the top 1 percent of earners take home 16.9 percent of the nation's total iIncome, but pay 36.7 percent of the nation's income taxes. The top 5 percent take home a little more than 31 percent of total income but pay almost 59 percent of all income taxes. And the top 10 percent earn just over 43 percent of the total income but pay more than 70 percent of all income taxes.
- mr_rationale
July 12, 2012 at 5:03pm
There are many reasons why the effective tax rate paid by the middle class has fallen, lower income tax rates being one (a very small one) of them. The middle class pays mostly payroll taxes, not income taxes, and payroll taxes have definitely not fallen (except for the temporary relief passed by Obama) and are imposed on gross not net income. A big reason for the drop in the effective tax rate paid by the middle class is that an increasing amount is not subject to tax, as more of the middle class are receiving social security and Medicare benefits (an aging population) and unemployment compensation. Noah is the expert, but I will suggest that he consider the marginal (not effective) tax rate paid by the working middle class. If he did, he might discover why the working middle class is incensed about taxes and the public benefits conferred on the less fortunate. To say nothing of the more fortunate (but not affluent) who earn up to the social security wage base and pay marginal rates of nearly 40% (or even higher).
- rayward
July 12, 2012 at 5:13pm
"President Obama wants to extend the Bush income-tax cuts, but only for families earning up to $250,000 per year." Out of curiosity, just how is Obama excluding families earning more than $250k from the extension of the tax cuts? Is he creating a completely separate tax bracket or increasing the top bracket proportionally? Doesn't anyone know how tax brackets work? I'm sure Noah does, but yet even he writes something like this. Families earning more than $250k will continue to get the BIGGEST tax cut of anyone as they'll fully benefit from all of the reductions at the lower brackets. This isn't hard.
- Nari224
July 12, 2012 at 5:25pm
Rationale--since when should we discount the highways because they originally came from the defense department? In any event, rebuilding the infrastructure of this country--bridges, highways, etc, as proposed by the President in the AJA wouldn't be done by the Defense Dept, but would still have a multiplier effect. Whatever your deadweight loss is, I would argue it's outweighed by the types of facilities and services that government spending via taxes can bring to the table. Hoover Dam, Lincoln Tunnel, La Guardia airport, etc, all public projects built during the New Deal--where's your deadweight loss here?
- ballston
July 12, 2012 at 5:34pm
rationale. You are dead wrong vs deadweight. Marginal tax increase on the wealthy have next to no downside on demand, job production, etc--- and decrease the national deficit. Macro eco 101 for any textbook after 1945.
- drofnats1
July 12, 2012 at 5:41pm
mr_r: "Can moonbats do math? Do they think the figures below indicate the productive private sector type are not paying their fair share?" mr_r obviously is incapable of doing any analysis whatsoever. Let's say 9 people each make $10,000, too low to pay income taxes, while one person makes $1,000,000. Then that one person, the top 10%, would be paying 100% of income taxes. How unfair! And that would be true even if that top 10% were paying an effective rate of only 1%. So a lot depends on the actual distribution. Plus mr_r obviously has not heard of the marginal value of money. $1,000 means a lot more to someone making $20k than someone making $2 million. Hence it's reasonable for those at the top to pay a greater proportion of total taxes than they take in as income. (Paying the same proportion would require a true flat tax which just about no one, not even Steve Forbes, believes in since just about everyone favors an exemption for low-income households which automatically creates a two-tiered progressive system.)
- dsimon
July 12, 2012 at 5:53pm
dsiom.. correct. another way of looking at it is What the right is claiming is that there’s a straight economic argument for low taxes on the rich, that going back to Herbert-Hoover-level taxes at the top makes everyone richer. There are somehow large social benefits due to increased effort from the wealthy that are not equally present when those further down the scale work more or harder. Which also means that an unguided economy is highly inefficient.. That is, conservatives argue that markets get it right, and workers are always paid their marginal product — except for the rich, who are paid much less than their marginal product, and therefore need special encouragement.
- drofnats1
July 12, 2012 at 6:55pm
doftnagts1: "What the right is claiming is that there’s a straight economic argument for low taxes on the rich, that going back to Herbert-Hoover-level taxes at the top makes everyone richer." Wouldn't it be nice if there were actual evidence to back that up? I wonder how many of the wealthy would trade today's tax rates and portfolio values for Clinton-era tax rates and portfolio values. It seems like an easy choice, which makes the support for Republican policies all the more befuddling.
- dsimon
July 12, 2012 at 10:30pm
That all sounds well and good, but I can't foresee any scenario in which congress would raise the top tax rate to 70%. It would be nice, but it will never happen.
- maxhencke
July 13, 2012 at 8:55am
Mr._Rationale Which would you expect to produce more innovation, a 15% lower tax on long term capital gains and dividends or taking lost government revenues from that reduced rate and investing it in education for techology and research? Also, do you think increased investing overseas, where labor markets are cheaper, or investors trading money among themselves are reasons to recommend having lower top tax rates?
- Nusholtz
July 13, 2012 at 12:04pm
What produces innovation is a blank slate: it's available by dropping ALL distorting subsidies and tax preferences including mortgage interest deduction, employer health insurance subsidies, the works. That amounts to a tax increase on everyone but the poor, which as Tim implies makes sense. Them who have gets more, but we don't need to harness the coercive power of government to exaggerate this natural tendency. We either get rational or the demographics overwhelm the whole argument.
- Robert Powell
July 13, 2012 at 3:56pm
I agree completely. The middle class should pay more taxes, as well as the wealthy. But Obama and the Dems are talking so much about saving the middle class that it will be a hard sell. Middle-class people are almost as self-centered as the rich. mr_rationale, I simply don't believe that the top 5% of Americans in income pay 59% of the taxes, and I don't care where you got your info. The top 5% have tax lawyers, some of whom are in the top 5% themselves. The top 5% did not get in that group by paying taxes. Your statistics are about as accurate as Romney saying 20 million Americans will lose their health insurance under "Obamacare." They're made up.
- magboy47.
July 13, 2012 at 4:06pm
magboy47: "I simply don't believe that the top 5% of Americans in income pay 59% of the taxes" mr_r's reasoning skills may be lacking, but I think his data here as stated are correct. The claim that the top 5% of earners pay 59% of federal income taxes (not "of the taxes") comes from 2009 IRS numbers. http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0. They also made 32% of the nation's income (that's why they're in the top 5% of earners), so with some modest progressivity that outcome makes sense. But when you look at all taxes, such as payroll taxes (flat or regressive), gas taxes, state income taxes, sales taxes (generally regressive since lower income households have more difficulty saving), and property taxes, our system overall is really not substantially progressive. http://economix.blogs.nytimes.com/2009/04/13/just-how-progressive-is-the-tax-system/
- dsimon
July 14, 2012 at 3:26pm