Can We Afford to Raise Taxes On High Incomes? Can We Afford Not To?


Another tax related post.  It appears that taxes, in particular, taxes on the top income bracket will be a major topic of debate propaganda for the next year and  a half until the next presidential election.  Part of the reason is because the tax deal done last December (2010) between Republicans and Obama last December (2010) perpetuated the Bush-era tax cuts until Dec. 31, 2012, just after the election.  Another reason is because the Republicans in Congress, led by Congressman Paul Ryan have passed a proposed budget that will cut the top individual federal marginal income tax rate to 25%, ten points below the even the Bush-era 35%!  (source: Reuters)

The Republicans and Tea Partiers basically offer three arguments for cutting the top tax rates on high-income folks. None of the arguments hold up under examination.  First, they argue that the U.S. is too heavily taxed already. So, let’s compare the U.S. to other countries in the graph at the right from CBPP.  The U.S. is in fact, a relatively low tax country compared with other developed, industrialized nations.  (although to be fair, we should note that the other countries on the graph pay for healthcare for all their citizens and most of it comes from the government budgets).

So let’s move onto the second argument.  Republicans like to argue that cutting taxes for the top end, for the rich and high income brackets will create jobs.  They repeatedly call these high-end income folks the “job creators”.  Apparently out of some pique, these people refuse to “create jobs” for us lesser people whenever their tax rates exceed some number around 35%.  Unfortunately, this concept has been tried before and found wanting.  Simply put, there’s no empirical support for the idea that cutting tax rates primarily on the top end bracket will create jobs.  See here and here for more details. George Bush and the Republican Congress cut taxes and tax rates in 2001. At the end of the decade, in December 2010, the net increase in jobs (employment) in the U.S. was zero. That’s right. Not a single net new job.  No more people were employed in Dec 2010 than were employed before the tax cuts.  As I’ve discussed before, this doesn’t mean that Keynesian theory that cutting total taxes collected on from the nation has been disproven. Rather it means that how the taxes are cut matters.  Tax cuts only work to stimulate the economy and create jobs when they create new spending.  Tax cuts on the top brackets don’t create new spending, though.  They create a boom market in fixed luxury assets such as mansions in the Hamptons, Vail, or outside the country.  Tax cuts on the top brackets help fuel investments in off-shore funds and overseas entities, but they don’t really drive much spending here at home, at least not the kind of spending that drives good jobs and middle-class incomes.  Let us not make a mistake, while the Bush-era tax cuts included some minor cuts for lower income brackets, the overwhelming benefit accrued to the top bracket, as shown below (again from CBPP).  For more details and to see the real empirical record of tax rates vs job creation/economic growth, see Presimetrics, a site and book well worth the read.

Now let’s consider the third argument often provided as to why we need to cut tax rates for the top bracket.  Strange as it may sound, but the argument is offered that it’s the fair thing to do.  I know when you look at comparable average tax rates by income bracket like I did here and here, that it seems like the tax code is already quite fair to people earning a million dollars or more.  Yet their argument goes that it’s the richest people who pay for most of the government’s total taxes paid.  They cite the fact that the top income bracket people pay the majority of all tax dollars collected by the government.  That’s true.  But they neglect to say that it’s because the top bracket gets the dominant share of income in the U.S, not because the tax rate is too high.  Indeed, the top bracket payers are the only ones who have really benefitted in the last 30 years and seen their incomes grow substantially.  See the accompanying CBPP chart to see how the top 1% has seen it’s income rise 281% since 1979 (as it’s tax rates have been on a long down-hill slide), while the lower 80% barely grew 25% income.  The reality is that the top bracket pays the majority of tax dollars because they get the majority of the nation’s income.  Yes, the income distribution numbers are that out of whack.  The top 1% of households by income get a whopping 17.9% of all national income.  That’s just the top 1%!  Their share was only 7.5% 30 years ago.  (source: CBPP)So, actually the fair thing would be for the top bracket to pay a little more since they’ve benefitted the most from the current tax regime.

During the 30 year time frame that the top bracket has been raking in a larger and larger share of the national income while seeing their income tax rates decline, the lower brackets, the ones with incomes below $100,000 have seen their payroll tax rates double to build a giant Social Security trust fund.

Overall, I think we can afford to raise tax rates on the high income tax bracket.  In fact, if anything, there are good reasons to raise tax rates on the high end. First, since our government persists in it’s belief that it must borrow to finance a deficit (an unnecessary self-imposed constraint) and since many politicians, including those Republicans, think it’s a good thing to reduce the deficit (opinion I do not share), then we should.  As I observed with the post on the do-nothing plan, letting the Bush-era tax cuts expire and letting the existing law take force in January 2013 to raise the top tax bracket to 39%, which it was during the Clinton low unemployment years is a good plan. Let’s see what happens when if we allow the Bush tax cuts to expire and let the top rate go back to the 90’s era 39% vs. keeping the present 35% rate.  Again, CBPP obliges.

A strong argument can be made that the top bracket benefits disproportionately from the work of the government.  It’s not the poorest households that have investments in the middle east and around the world that are protected by the U.S. global military presence. It’s the richest. Time to pay the bill.