Taxes, the Deficit and the Economy
EDITORIAL: September 21, 2011
Republicans, predictably, are denouncing President Obama’s proposal to raise taxes on wealthy Americans and corporations to help wrestle down the nation’s budget deficit and pay for his job creation plan.
There was the usual silly talk about class warfare against the rich. Rick Perry said the president’s plan “penalizes investment when it is needed most.” Mitt Romney blasted the plan’s “crushing impact on economic growth.” A spokesman for John Boehner, the House speaker, called it a collection of “job-killing small-business tax hikes.”
Americans need to take a close look at what Mr. Obama is calling for:
HIGHER TAXES FOR THE RICH The Obama plan would allow the Bush tax cuts for the wealthiest Americans — individuals earning more than $200,000 a year and households earning more than $250,000 — to expire at the end of 2012. That would restore the top two marginal tax rates to 36 percent and 39.6 percent, up from 33 percent and 35 percent today. It would also restore the estate tax, which vanished completely in 2010, and raise the capital gains tax on wealthy individuals from 15 percent to 20 percent.
The full Bush-era tax cuts were the single biggest contributor to the deficit over the past decade, reducing revenues by about $1.8 trillion between 2002 and 2009. The White House estimates that Mr. Obama’s plan would raise $866 billion over the next decade, or nearly half of that.
As for the supposed job-killing effects, President Bill Clinton raised tax rates to where Mr. Obama wants to restore them now, and the economy grew faster and added many more jobs during those eight years than it did after President George W. Bush slashed taxes across the board.
Republicans’ main claim is that the higher rates will penalize small businesses that file as individuals. But only about 2.5 percent of all small-business owners earn enough to be taxed at the top two rates, according to the Treasury’s Office of Tax Analysis. Even more important, the argument ignores the fact that the higher income tax rate would apply to business profits, not revenues. Small businesses would still be able to deduct or amortize payrolls and investments.
Critics also claim that raising the capital gains rate would hamstring investment. The truth is that despite the current low tax rates, American businesses — small and big — are investing very little. Business surveys show that the main reason is that there are very few customers with money to buy their products.
THE ‘BUFFETT RULE’ President Obama has said that tax reform should follow the principle that no household making $1 million or more should pay a smaller share of its income in taxes than a middle-class family. Republicans say this is an act of “class warfare.” But it is clearly unjust to have a tax system that, today, allows 22,000 households earning more than $1 million to pay less than 15 percent of their income in federal income and payroll taxes — less than half of what a middle-class family pays.
Allowing the Bush-era tax cuts for the wealthy to expire would go some way in this direction. So would his proposal to require managers of hedge funds, private equity funds and other investment vehicles to pay standard income taxes on their pay, rather than paying at the much lower capital gains rate.
CAPPING DEDUCTIONS FOR THE WEALTHY Many wealthy Americans reap bigger gains from their tax deductions — of mortgage payments, charitable contributions and the like — than the middle class. Taxed at the top marginal rate of 35 percent, they get back 35 cents out of every dollar of authorized deductions. Middle-class filers, who pay a marginal rate of 28 percent, get only 28 cents back.
The president’s proposal would cap the benefit at 28 percent for wealthy taxpayers, raising about $410 billion over 10 years, according to the White House. The idea tracks those proposed by Martin Feldstein, Glenn Hubbard and Greg Mankiw, top economic advisers to Presidents Ronald Reagan and George W. Bush.
CORPORATE LOOPHOLES Mr. Obama is also calling for eliminating unnecessary tax breaks and subsidies for oil companies, the coal industry and others to raise about $300 billion over 10 years. That is drawing fierce criticism from Republicans eager to shield big campaign donors. These scams need to go.
Mr. Obama was right when he told Congress that the country has choices to make. “Should we keep tax breaks for millionaires and billionaires? Or should we put teachers back to work so our kids can graduate ready for college and good jobs? Right now, we can’t afford to do both.” His argument is sound, and so is the economics behind it.