What would happen if the government raised everybody’s taxes?
The fiscal deal struck in the wee hours of 2013 will raise at best $700 billion from higher taxes on wealthy Americans in the coming decade. This is hardly enough to stabilize the nation’s debt in the next 10 years, let alone deal with a long-term budget deficit that is expected to mushroom as the population ages and spending on entitlements rises.
To make ends meet, both parties agree, spending must be drastically cut. Under the White House budget proposal, discretionary spending on everything except the military is projected to shrink to its smallest share of the economy since the Eisenhower administration by the beginning of the next decade. Though he has resisted Republican demands to slash entitlements, President Obama remains willing to look for further savings from Medicare.
This is not, however, the only option we have. There is an alternative: raising more money from all taxpayers, including the middle class.
Nobody wants to talk about this. Republicans don’t want to raise taxes at all. “The tax issue is finished, over, completed,” declared the Senate minority leader, Mitch McConnell. President Obama does want to raise more money, but only narrowly. His proposals for tax reform are aimed carefully at high-income taxpayers and corporations.
Yet Americans would benefit from a discussion of this possibility. Higher taxes would undoubtedly stress many working families, especially after a decade of falling income for all but the most successful. But these families might nonetheless prefer paying more in taxes to losing government services they rely on.
A good way to start the debate might be to explain what higher taxes would entail for middle-class families, so they could balance the bill against the benefits they would otherwise lose. “One way or another, middle-class people are going to take a hit,” said Eric J. Toder, a co-director of the nonpartisan Tax Policy Center. “It’s unfortunate that neither party is willing to admit that.”
The tax hit would depend, of course, on the size of the federal bill. The Center on Budget and Policy Priorities, a liberal-leaning research group, has suggested that after the fiscal deal, we need only $1.4 trillion in additional deficit reduction to stabilize the federal debt at about 73 percent of the economy over the next decade.
That $1.4 trillion amounts to less than 1 percent of our economic output. But it would come on top of enormous cuts to civilian discretionary spending, from the National Institutes of Health to training programs for unemployed workers. What’s more, the center’s analysis stops in 2022, before the budget deficit is really expected to take off.
We might consider instead the experience of other advanced countries, which raise more money in taxes than we do to pay for programs like child care for working mothers and government-financed health care for everybody.
Taxes in the 34 nations of the Organization for Economic Cooperation and Development averaged about 34.5 percent of gross domestic product from 2004 to 2010, the latest year for which the organization provides data. That’s about 8.5 percentage points more than our federal, state and local taxes put together in the same period.
Or we might try something between the two. In November 2011, before the White House and Congress raised taxes on the wealthy, the Tax Policy Center analyzed how the United States could reduce the debt burden using taxes alone, without resorting to deep cuts to entitlements or discretionary spending.
Compared with a situation in which all of the Bush administration’s tax cuts were extended indefinitely and other government policies remained in place, the center estimated that we could trim the federal debt to 60 percent of gross domestic product, from about 70 percent, in two decades by increasing tax revenue by 4.1 percent of gross domestic product — some $650 billion last year.
The average cost of this option for American taxpayers, according to the policy center, is substantial. But perhaps it is bearable: over the long term, beyond one-time adjustments, the after-tax income of the average American family would fall by 6.6 to 7.1 percent. This might be seen as the price tag for saving the government roughly as we know it.
The burden could be distributed in several ways. In one possibility, the center estimated, the top federal income tax rate for the richest families, earning more than $398,600 a year, would rise to almost 54 percent, well above the 39.6 percent agreed to in the recent fiscal negotiations.
The poorest Americans, earning $17,850 or less, would pay a top rate of 15.4 percent, up from 10 percent today. Middle-class families, earning $17,850 to $72,600, would see their top tax rate rise to 23.1 percent from 15 percent.
This would distribute the burden fairly progressively, drawing a larger share of taxes from wealthier Americans. The top 1 percent of taxpayers would see their after-tax income drop 13.1 percent. The poorest fifth would only lose 0.4 percent of their income. Middle-income families would lose about 4.2 percent, on average — about $2,000 for a family earning $50,000 a year.
But that’s not the only way to increase taxes. Most economists agree, in fact, that it is a costly method. High income tax rates blunt incentives to earn more, putting a drag on economic growth. Another option is to tax the money that people spend, using the kind of value-added tax employed in every other advanced country. The Tax Policy Center estimated that the government could hit its revenue targets with a broad V.A.T. of 16.7 percent.
Such a tax would look like a sales tax, an extra charge on the purchase of goods and services. Because it wouldn’t discourage work or investment, it would not slow growth like a high income tax rate would. But because the poor spend a larger share of their money than the rich, it would fall more heavily on lower-income Americans.
Even if the government were to offer a rebate to compensate the poorest among us, their after-tax income would decline 1.3 percent, according to the policy center’s analysis. The income of the top 1 percent would decline 7.6 percent. Families in the middle of the income distribution would lose 6 percent — $3,000 from an after-tax income of $50,000.
Citizens of other advanced nations appear to believe that a richer array of government services is worth the price. Standard V.A.T. rates in almost every European country exceed that in the Tax Policy Center’s analysis. Europe’s social democracies compensate for the regressive nature of the tax by spending the money on benefits that are particularly valuable for the poor.
Americans have historically been more hostile to taxation than citizens of other wealthy nations. Still, our elected officials’ refusal to discuss higher taxes may overstate our aversion. Respondents to a poll by the Pew Research Center in the fall of 2011 thought, almost two to one, that it was more important to avoid cuts in Social Security benefits than to avoid payroll tax increases.
According to a CBS/New York Times poll last summer, 74 percent of Americans oppose shorter school days or more crowded classrooms, even if those measures would lower their tax bill significantly. And 82 percent oppose lower taxes if that means reducing the ranks of the police.
Clearly, Americans value government services. We may welcome an opportunity to save them.
E-mail: eporter@nytimes.com;
Twitter: @portereduardo
Article source: http://www.nytimes.com/2013/01/23/business/higher-taxes-on-everyone-could-ease-spending-cuts.html?partner=rss&emc=rss