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A case for increasing taxes on the rich

Adam Newman | Wednesday, February 22, 2012

Unprecedented inequality, a weak economy and rising deficits have propelled the question over whether or not to increase taxes on the richest Americans to the forefront of the American political discourse. Based on America’s current and future fiscal situation, along with the growth in income inequality over the past 30 years, I will make the case for increasing taxes on the richest Americans.

Even as the economy improves over the next decade, America faces massive deficits. While America can sustain high deficits temporarily during a weak economy, it eventually has to embrace deficit reduction through a combination of higher taxes and lower spending (economic growth can also help decrease the deficit, but it is very hard to predict the amount of growth certain policies will create).

Most economists agree that America needs at least four trillion in deficit reduction to stabilize the national debt over the next decade. It is mathematically possible to create an “all cuts” deficit reduction package. But many who promote deficit reduction with just cuts and no tax increases do not understand, or simply ignore, the human cost of their decisions. By 2015, roughly half of all spending will come from the main drivers of the debt: Social Security, Medicare and Medicaid, the programs that provide for elderly, sick and poor Americans. Any major deficit reduction must come from reforms in these three programs. Changing how health care is delivered in America could reform Medicare and Medicaid without having seniors pay more, but these reforms are complex and politically difficult. As a result, almost all current deficit plans will force elderly, poor and sick Americans to pay more for these programs and receive less in benefits. It is not a question of “if?” but “how much?”

As political leaders contemplate the structure of deficit reduction, one trend cannot be ignored: the rising growth of income inequality in America. A recent report issued by the non-partisan Congressional Budget Office (CBO) highlighted the disturbing increase in inequality for after-tax income growth between 1979 and 2007 (adjusted for inflation). The CBO found that the incomes of the wealthiest one percent of the population grew by 275 percent. The income of Americans in the wealthiest two to 20 percent grew by 65 percent. The income of Americans in the middle 21 to 80 percent bracket grew by 40 percent, and Americans in the bottom 20 percent of income earners only grew by 18 percent. During this time, the average tax rate for the highest 20 percent of wage earners declined from 27.5 to 25.1 percent.

At a time when the richest Americans have seen unmatched income growth, it is common sense that they should help soften the financial hit that the elderly, sick and poor Americans will take over coming decades. This is not a punishment of successful people or a call to end free enterprise, but simply part of a balanced plan to get America’s fiscal house in order.

The best approach to increasing taxes on the rich would be to limit their tax expenditures. Expenditures could be limited for the rich by taxing capital gains at ordinary income levels, limiting the tax exclusion for employer-sponsored health care benefits and limiting the deduction for mortgage interest. This method could raise revenue while allowing tax rates to stay the same (this is important because raising rates would discourage work).

However, the power of special interests in protecting favorable provisions in the tax code makes this type of tax reform unlikely. As a result, the simplest way to raise taxes on the rich would be to let the Bush Tax Cuts expire for the wealthiest two percent of Americans (individuals with income over $200,000 and families with income over $250,000). This would increase the two highest marginal tax brackets, currently at 33 and 35 percent, to 36 and 39.6 percent, respectively, increasing revenue by roughly 700 billion over a decade.

Many Republicans argue that letting taxes rise on these Americans would hurt small business owners (people who own businesses that file their business earnings as income taxes). While this claim has been used very effectively politically, it is wildly exaggerated. A report from the non-partisan Tax Policy Center projected that in 2011, 774,000 out of 36 million taxpayers who report business income would see a tax increase if the Bush tax cuts expired for the two highest marginal income tax brackets. This means that ending the Bush tax cuts for the wealthiest Americans would only affect two percent of small business owners.

I am always very hesitant to embrace the language of “us versus them,” “American versus anti-Americans” or “one percent versus the 99 percent” because divisive language will never be able to unite Americans together to face the major fiscal challenges that lie ahead. So yes, let’s raise taxes on the rich, but only as a part of a “shared sacrifice” where everyone does their part. In the end, America rises and falls as one.

Adam Newman is a junior finance major. He can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.