Commentary | Budget, Taxes, and Public Investment

In favor of progressive taxation and a balanced approach to budgeting

In outlining a budget framework for the Super Committee, President Obama has drawn a much-needed line in the sand over the need for progressive taxation and certain government programs. This framework for job creation and deficit reduction called for more revenue from the most fortunate citizens and rejected a spending-cuts-only approach to the budget (backed by a veto threat).

Progressive tax modernization can and should raise significant revenue to finance job creation and public investments, shrink deficits, and ease pressure elsewhere in the budget. It can moderate recent and persistent trends toward widening income inequality and hyper-concentration of wealth, helping to restore a society of shared prosperity. Progressive taxation is a palatable approach to deficit reduction embraced by the public—unlike nearly every other deficit reduction approach. Simply put, progressive taxation is fiscally responsible, economically sensible, and politically viable.

President Obama proposed that Congress reform the tax code while raising $1.5 trillion in new revenue over the next decade. The president also outlined principles for tax reform, including the “Buffet Rule” that middle class Americans shouldn’t be paying a higher tax rate than some millionaires.

Looking to millionaires, and to high-income households generally, for more revenues is an appropriate response given recent trends in income and tax policy (see the EPI Issue Brief “The facts support raising revenues from the highest-income households” for a full discussion). At 17.4%, Warren Buffet’s average tax rate is equal to the average rate for households with earnings between $50,000 and $75,000 in 2007, indicating that his average rate is less than many of these middle-income households. Average income tax rates typically peak between $1 million and $2 million in adjusted gross income, and then fall as households collect a greater share of income from capital gains and dividends, currently taxed at a 15% rate.

Buffet’s call to Washington to “stop coddling the super-rich” could be directly answered by ending the preferential tax treatment of investment income over work income. More than half the benefit of preferential capital gains treatment goes to the top tenth of one percent of households, according to the Tax Policy Center. Reinstating higher tax brackets for millionaires would also help: the income cutoff for the top marginal tax bracket for married joint filers has fallen precipitously from roughly $3 million in the early 1950s (adjusted to current dollars) to $1 million in 1970, to $379,000 today.

The president also underscored the broad principal that tax reform should produce more revenue. The tax code’s design inadequately funds today’s needs, let alone the demands of an aging population and spiraling health care costs. The president threatened to veto any deficit reduction package that does not include new revenue.

This call for balanced deficit-reduction through more tax revenues is entirely appropriate. A spending-cuts-only approach is regressive in that it forces the brunt of deficit reduction on the backs of poor and working families while ignoring a prime culprit of the budget deficit: the expensive, ineffective, and unfair Bush-era tax cuts. These top-heavy tax cuts added $2.6 trillion to the public debt over 2001-10 and will add $3.8 trillion to deficits over the next decade if fully continued. Because most of these tax cuts are assumed to continue, the president’s framework leaves revenue $2.7 trillion below the levels scheduled under current law (or $3.4 trillion if Congress also maintains a slew of business tax credits, such as the research and experimentation credit). Congress is now paying for sweeping tax cuts with deep spending cuts, including roughly $1 trillion in discretionary spending cuts enacted earlier this year.

Beyond defunding government, the Bush-era tax cuts presided over the worst post-World War II economic expansion—measured in terms of GDP, investment, employment, or wages and salaries. We cannot afford to double-down on the “cut taxes for the wealthy and the rest will benefit” economic fallacies of the last decade; the money never trickled down. Instead, those tax policies reinforced trends of ever-widening income inequality; the top 1% of earners captured 65% of all income gains during the Bush economic expansion while the top 1% also received 38% of the value of the Bush-era tax cuts in 2010, according to TPC. Because the big money has accumulated to the top sliver of earners and because regressive tax cuts are responsible for much of the budget deficit, progressive taxation should be the core of any serious deficit-reduction proposal.

The economy is not working for the middle class, as demonstrated by persistently high unemployment, falling median income, rising poverty, and decades of widening income inequality, among other indicators. In this context, it is unsurprising that voters favor progressive tax increases but overwhelmingly reject cuts to economic security programs such as Social Security, Medicare, and Medicaid.

Those doubting the viability of the president’s proposals need only look to the polls. A March 2011 NBC/Wall Street Journal poll on options for reducing the deficit found that 81% of participants endorsed a surtax on individuals earning over $1 million; this was the only option ranked “totally acceptable” by a majority of respondents. More than three out of four respondents supported eliminating tax subsidies for oil and gas industries, while two out of three supported ending the Bush tax cuts for households earning more than $250,000 a year, both steps proposed by the president’s new framework. Supply side apostate Bruce Bartlett recently compiled a litany of polls showing that deficit plans containing new revenue are favored roughly two-to-one over plans without revenue.

On the other hand, the NBC/Wall Street Journal poll found 67% of participants opposed cutting Medicaid and a resounding 76% opposed cutting any Medicare benefits. A majority also opposed replacing Medicare with a voucher. Armed with public opinion on their side, the administration and congressional Democrats must hold their line on progressive taxation and the positive role of government rather than cave to the conservatives’ “my way or the highway” attempts to dismantle the legacies of the New Deal and Great Society.

The House Republican 2012 budget embodies the spending-cuts-only approach. Medicare is turned into a voucher, thereby undermining the commitment to provide seniors with comprehensive health care, while federal Medicaid spending is halved over the next two decades. The Center on Budget and Policy Priorities estimated that roughly two-thirds of the spending cuts from this budget approach would come from programs for lower-income households, particularly Medicaid, Pell Grants, and food stamps. This approach turns the concept of “shared sacrifice” on its head and more closely fits the label of “class warfare” than the president’s proposal to collect more revenue from high-income households, who by definition are best able to contribute, and over time have seen their incomes skyrocket and taxes fall sharply.

In his recent address to the joint session of Congress, President Obama rightfully rejected any campaign to “dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own.” There are worse things than paying taxes—just ask any one of the 25 million un- and underemployed Americans. There are also goods and services that the private sector will never provide or will underinvest in, such as transportation, education, clean air and water, or health insurance for seniors and the disabled. Fiscal responsibility does not require eviscerating social programs and public investments that promote economic security and generate growth. Fiscal responsibility means paying for the popular economic security programs and investments people widely value. Reforming the tax system in a progressive manner that increases revenues is an essential step toward achieving this fiscal responsibility.

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