(Original Post)
By Zachary Roth
In the ongoing debate over reducing the deficit, most experts agree that both spending cuts and tax increases will have to be part of the solution. So far, the former have received way more attention than the latter. But that could be about to change.
On Wednesday, President Obama will give a speech that lays out his strategy for reducing the deficit. In addition to cuts to Medicare and Medicaid and changes to Social Security, he also will call for -- as he has before -- not extending the Bush tax cuts for those earning $250,000 or more. He may also embrace the deficit-reduction proposal of the Bowles-Simpson commission, which recommended scrapping some popular existing tax breaks, like the high-earner benefiting Alternative Minimum Tax and the mortgage-interest deduction, to save about $1.3 trillion.
"Revenues are going to be have to be part of this," David Plouffe, a senior White House adviser, said on Sunday.
Economists, too, seem to believe that taxes are likely to go up sooner or later. And voters -- perhaps responding to rapidly growing income inequality -- appear open to the idea, at least for the rich. Polls show that more Americans favor repealing the Bush tax cuts for high-earners than oppose it.
But opposition to tax hikes is perhaps the central plank of the modern GOP platform, and the party has committed itself to fighting to preserve the Bush cuts. That suggests a showdown is likely.
So before the debate gets too consumed by politics, it's worth taking a closer look at the issues around increased taxes.
Failing to extend the Bush cuts for those who make $250,000 or more -- which in December were extended through 2012, in a deal between President Obama and Republicans -- would mean that the richest 2 percent of Americans would pay a rate of 39.6 percent. This was what the segment paid in the 1990s, rather than the current 35 percent. According to Treasury Department numbers (pdf), the return to 39.6 percent, as compared to keeping tax cuts in place, would save an estimated $50 billion in 2013, and $680 billion by 2020.
There's quite a bit of confusion about these tax rates, so to back up and explain: Because the U.S uses marginal tax rates, those who pay 35 percent do so only on the portion of their income over $250,000. It would be the same if we returned to a top rate of 39.6 percent. That's why it wouldn't make sense to try to game the system by keeping your income just under the $250,000 threshold.
But there's also a farther-reaching approach on the table. A bill introduced by Rep. Jan Schakowsky (D-IL) would increase the top marginal tax rate from 35 percent to 45 percent for married couples making $1 million or more a year, and to 49 percent for billionaires. That would reduce the deficit by around $78 billion this year alone -- more than twice as much as was saved through the spending cuts agreed to last week -- and $784 billion over ten years, according to an estimate prepared for Schakowsky's office by Citizens for Tax Justice, a progressive think tank.
Schakowsky's plan isn't likely to become law. There's almost no support among Republicans for raising the top rate. But as Nancy Folbre, an economist at the University of Massachusetts, Amherst notes, a top rate of 49 percent would still be low by historical standards. As recently as the late 1970s, it was 70 percent.
Republicans argue that raising taxes will hurt economic growth. "If you go down the tax increase path you're sacrificing the economy," Rep. Paul Ryan of Wisconsin, the party's point man on budget issues, said on Meet the Press Sunday. Indeed, Ryan's own budget proposal, released last week, would lower the top rate to 25 percent.
But as far as growth is concerned, lower taxes are hardly the most efficient way to stimulate the economy. A Congressional Budget Office study (pdf) last year found that cutting taxes produces less growth than almost any other cost-equivalent action the government could take. This includes extending jobless benefits, investing in infrastructure, giving an extra payment to Social Security recipients, and instituting a payroll tax holiday. Plus, during the 1990s, when tax rates for the rich were at the level to which the White House wants them to return, growth was far stronger than in the last decade under the Bush rates.
(AP Photo/Pablo Martinez Monsivais: President Obama with Rep. Paul Ryan (R-Wisc.) [second from right] in February 2010)