TIMOTHY NOAH JULY 12, 2012
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 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 they're wrong. Federal tax rates are actually 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.