Economix: Taxing the Rich

The Tax Foundation

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Increased taxes on the rich could balance the budget and end the showdown over how many billions to slash from social spending.

Consider, for instance, the Fairness in Taxation Act introduced by Representative Jan Schakowsky, Democrat of Illinois, which would increase the top federal marginal income tax rate to 45 percent for married couples earning more than one million dollars a year and to 49 percent for billionaires, from the current rate of 35 percent.

Historically unprecedented? Hardly. The top marginal tax rate was 50 percent in the mid-1980s and even higher in the 1950s (as the chart shows).

Such a boost could raise an estimated $78 billion, more than the current Republican budget-cut goal. Even if it fell far short it would avert proposed cuts for many valuable programs, including Head Start, which provides early childhood education, and Pell Grants, which help low-income families send their children to college.

Some outspoken millionaires, including the billionaire Warren Buffett, have long advocated increased taxes on the rich.

Plenty of ordinary Americans favor this policy as well. An NBC News/Wall Street Journal poll conducted in February offered 26 different ways of reducing the federal budget deficit. The most popular option, considered acceptable by 81 percent of respondents, would place a surtax on federal income taxes for those who make more than $1million a year.

As Robert Kuttner points out, even the “national town meeting” sponsored last June by the Peterson Foundation, a strong advocate of cuts to entitlement spending, reported that 58 percent of participants favored a new, higher tax bracket for millionaires.

Opponents of such a policy argue, variously, that it would be unfair, inefficient or politically impossible.

Would higher rates be unfair? The top 1 percent has increased its share of total income to more than 20 percent today from about 10 percent in the 1960s.

Those who believe that income can be generated only by brilliant innovation, bold risk-taking and hard work may conclude that this group has simply grown more productive over time. It seems more likely that changes in the structure of the global economy have delivered rich windfalls to those at the top.

Would higher rates be inefficient? Many argue that lower tax rates on the rich encourage more effort and more investment. If true, much depends on where this effort and investment goes. The development of new credit derivatives didn’t help most American taxpayers. It forced them to lend money to bail out big banks.

The historical record does not support the claim that high marginal tax rates dampen the economy. Average annual rates of growth in gross domestic product in the high-tax era between 1950 and 1980 exceeded those of the last 30 years. Increases in the top tax rate under President Clinton were followed by robust economic expansion.

A recent essay in The Wall Street Journal asserts that the high volatility of income at the top makes it impractical to rely on taxing it. But these concerns are overstated and can be easily addressed by rainy-day funds that set some revenues aside as a buffer against variation.

Are higher rates politically impossible? Fierce opposition to them has been stoked by fear that higher taxes on the rich will inevitably lead to higher taxes for almost everybody else. Indeed, the rich exercise considerable power to relocate themselves and their investments to minimize their tax liabilities.

But American voters have the power to increase tax revenues from millionaires and have recently done so in eight states: California, Connecticut, Hawaii, Maryland, New Jersey, New York, Oregon and Wisconsin. A detailed study of the New Jersey case, published in the National Tax Journal by Cristobal Young and Charles Varner, found little effect on millionaires’ migration from the state.

Those who are furious at the very idea of a millionaires’ tax often portray those who work in the public sector or benefit from government programs as parasites.

Can voters be convinced that teachers, police officers, firefighters, students, retirees and the unemployed represent the waving arms of a giant vampire squid sucking money from the rest of us?

Maybe, for a little while, they can. But soon, those waving arms, and many other voters, will feel the knife of budget cuts — and new varieties of pain.

Article source: http://feeds.nytimes.com/click.phdo?i=01462944fa99c849d7fbcd4a710d2924