RSS Feed MenuPresident Barack Obama may be dealing with sagging poll numbers and a disappointed party base but, by all accounts, he has kept his campaign promise not to propose any sweeping tax increases for the middle class. If he’s serious about reducing the record $1.6 trillion federal deficit with a minimum of overall economic pain, however, he may want to break that promise.
So far, however, he’s shown no sign of doing that instead, seeking solace with the time-tested left-wing refrain of “soak the rich.” With record deficits, ambitious spending plans of his own, and no practical proposals (from Democrats or Republicans) to achieve lasting reductions in spending, the President has laid out a plan for the first broad tax increases in almost 15 years. Under his budget proposals, banks would pay billions as a “financial crisis” responsibility fee, households earning more than $250,000 would see Bush-era tax cuts expire, taxes on dividends would rise, and capital gains taxes would skyrocket. Not all of these taxes will hit fat cats alone—for example, middle income people recognizing lifetime capital gains prior to retirement look “rich” to the IRS—but it’s fair to say that most everyday Americans would only feel their impacts indirectly. And, if Congress can’t find a way to actually reduce spending (which it should), indeed, the roughly $1 trillion in revenue from these tax hikes is absolutely necessary to prevent deficits from spiraling out of control and sending interest rates soaring sky-high.
Although it’s possible that some of these new taxes may make sense in isolation, the single-minded focus on “soaking the rich” shows a remarkable shortsightedness and creates extreme danger. Almost all taxes, by definition, have distorting effects. In some cases—sin taxes on alcohol and tobacco—these distortions may be welcome but, in the aggregate, they have tremendous negative consequences for those who value free choice and free markets. Raising capital gains taxes, for example, discourages investment (and, because capital gains taxes aren’t indexed for inflation, is intrinsically unfair to boot) while increasing marginal rates on stock dividends encourages cash-rich companies to fritter away cash on long-shot projects rather than sending it back to stockholders. After a certain point, likewise, raising taxes on the rich in any way can be self-defeating: people with nearly limitless resources can always move elsewhere to escape taxes. States like California and New Jersey that tried it to deal with recent crises found revenue disappointing both because the recession deepened and because well-off people decamped for lower tax locales.
Relative to chasing away investment, middle class tax hikes begin to look pretty good. A one-percent income tax increase for people earning between $30,000 and $80,000, would cost a typical family of four somewhere around $50 and probably do just about nothing to impact behavior. Relative to a capital gains tax hike that would raise the same amount of revenue, it seems like a less harmful step.
The point, of course, isn’t that the President should immediately draw up plans to seize more the paychecks of teachers, middle managers, and bus drivers but, rather, that a focus on taxing the rich alone is a silly way to try and raise revenue. Ideally, spending cuts are in order. But if Congress must raises taxes, it should consider raising them on the middle class.
hormelmeatco // Feb 10, 2010 at 12:03 am
“Ideally, spending cuts are in order.”
Specifics, please. I won’t take anyone who advocates for reduced government spending seriously unless they specifically say what they would cut.
Mandos // Feb 10, 2010 at 12:23 am
Uh-huh. Taxing a shrinking middle class is your solution?
The wealth gap has gotten wider and wider in the USA, and the economy has not gotten better for it. I can’t think of *better* advice at this point than soaking the rich. 90% taxes on income above, say, 250K would do it. It would *force* investment rather than bonuses, and it would drain the speculative reservoir, a reservoir currently full of caustic substances.
kevin47 // Feb 10, 2010 at 1:11 am
“Specifics, please. I won’t take anyone who advocates for reduced government spending seriously unless they specifically say what they would cut.”
Specifics are for crazed ideologues. Pragmatism speaks in generalities. You want to be a centrist, don’t you?
Mandos // Feb 10, 2010 at 1:22 am
For once, I totally agree with Kevin. Want to be a centrist? Simply ditch any coherent and internally consistent policy ideas. Once you have a sinz-like jungle of self-contradictory political fetishes and decorations that maximally demonstrate your aloof iconoclasm, you’re a “centrist.” And maybe even bipartisan—Nirvana attained!
rbottoms // Feb 10, 2010 at 7:10 am
Uh-huh. Taxing a shrinking middle class is your solution?
Uh, when did someone making $250,000 a year become middle class?
And forget that crap of conflating the income of the business with the owner’s take home pay. If, your paychecks add up to $250k a year you are upper middle class bordering on upper class folks.
You make more than 97% of everybody else in the country, so don’t expect me to weep if you have to shell out an extra couple hundred. And for the record, I am making every effort to fall exactly into the tax bracket. All Obama is doing is returning tax levels to before George Bush went on his spending/destroy two foreign contries/wreck the US economy binge.
oldgal // Feb 10, 2010 at 7:50 am
Add 1 percent tax to folks making $30K? Before recommending this, I suggest you try living on $30K. And oh, by the way, folks making $30K generally don’t have employer paid health insurance, so be sure to throw health care costs into your budget. I personally would rather make $250K and pay an extra 1 percent than make $30K. Before beating the drums about taxes kill investment, I recommend you read the posts at interfluidity.com – way too much of the investment dollars out there are not going into instruments that help grow the economy – in fact way too much goes into those instruments that got us into our current fiscal situation.
Bosco // Feb 10, 2010 at 9:50 am
It would be an honor to pay taxes on $250K+. Of course I consider being an American an honor. I guess when one achieves a certain rarefied financial state, a certain loyalty to the $ transcends loyalty to the state that enabled such ascendance.
sinz54 // Feb 10, 2010 at 9:53 am
Mandos: Want to be a centrist? Simply ditch any coherent and internally consistent policy ideas.
Centrists like me are reality-based.
And reality is messy. It’s chaotic and random and nondeterministic. It’s facts and emotions and psychology. It’s (to borrow a phrase from Rod Serling) both science and superstition. It’s things we understand well and things we’re still struggling to understand.
And so, no one ideology explains everything or gives you all the answers to everything. The previous attempts to create these great cyclical theories of history that would explain civilization’s past and future (Adam Smith, Karl Marx, Oswald Spengler) have all been found to be significantly flawed, if not outright failures.
For myself, I think that ensuring that all policies are thoroughly grounded in reality, never denying uncomfortable facts nor scientific theories with unpleasant philosophical implications, is a great first starting point.
balconesfault // Feb 10, 2010 at 10:45 am
I’m beginning to believe that there are really 4 points on the political line (talking just the economic one here), and not 2 poles.
At one extreme, there are true communists, or even pure socialists, who believe that government should absolutely command and control all aspects of the economy.
At the other extreme are the Mises camp, the pure free marketeers, who believe that any government intervention in the marketplace is an abomination that will only reduce the efficiency of the markets.
In the middle are the center right, and center left – both accepting the proposition that private ownership is critical to our economy … and that a strong government presence is critical to our economy.
In terms of influence on our current political system, I’d put it something like this:
Communist/socialists: 1%
Center left: 45%
Center right: 35%
Libertarians: 19%
Bernie Sanders is the only Socialist in Congress. There are a number of Democratic congressmen who are really center-right on the economic spectrum, as the last 12 months have shown. There are no Republicans who are on the center-left of the economic spectrum, and a solid cadre who have thrown in with the libertarians, although from time to time their actions suggest that they really don’t believe the libertarian position as much as they find it a convenient cudgel to wield in a political shitfight.
Right now I see the problem being that even center right Republicans have decided that working with the center left is a political loser for them … so they’ve just decided to fall in with the party. And the party has largely decided that they have to all talk like the libertarians (except when they’re schizophrenically defending Medicare benefits from cost controls).
So we have the current stalemate in the healthcare debate – where the Republicans have basically said “we need to start from scratch, and Obama needs to accept all our ideas, and reject anything that isn’t one of our ideas, or we’ll continue to obstruct”. Of course, everyone knows that’s not going to happen.
Center right Republicans know that something needs to be done, but they’ve basically decided to let the train crash with hope that America will turn to them after the crash. And their hope, I guess, is that center-left Democrats will be there to work with them after Republicans get power again sometime in the future, and that they can abandon the libertarians and cobble out some center right reform going forward.
Of course, by then, whatever train wreck is coming will be on top of the economic destruction that’s already occurred thanks to 8 years of Bushism. Will it actually be possible for government to actually govern in a center right or center left manner at that point? History shows that in such cases, we’re far more likely to get a revolutionary swing over to either the extreme left or right as the current government is too weakened as an institution, functionally and in the minds of the people, to prevent it.
But I guess that we’ll get to see how this game of chicken by the center right works out. At the moment, they’re tossing their hats in with the libertarians who are actually looking forward to the complete collapse of government as the only way to eliminate what they see as the evil of statism.
sinz54 // Feb 10, 2010 at 11:02 am
balconesfault:
Your analysis is pretty good.
The percentage of libertarian-minded types in the GOP has grown enormously by default. (The National Review, now that Buckley is dead, no longer cares to explain why conservatives should not be libertarians.)
But I take issue with your claim that we center-rightists are all nihilists, just waiting for Obama to crash.
David Frum clearly is not doing that.
In the Senate, Bob Bennett worked with Ron Wyden on a truly centrist health care reform bill, which of course was ignored by Obama and Pelosi.
Olympia Snowe tried to work with Max Baucus on health care reform for months, before Reid stabbed her in the back.
Several moderate Republicans were willing to work on climate change, but they too were ignored by the Dem leadership.
The problem has been the persistent attempts by the Dems to marginalize moderate Repubs, rather than embrace them. Because electorally, moderates (of both parties) always represent the “low hanging fruit”–the ones in swing districts and swing states who can be toppled by a determined political attack. And the Dems don’t want moderate Repubs to get any publicity–that would counter the Dems’ attempts to paint the entire GOP as “extremist.”
There is a very real path to create a working coalition of moderate Dems and moderate Repubs. Your own analysis shows that such a coalition would have a majority in Congress.
Hillary, if she were President, would be pleased to have such a coalition on her side. But Obama and Pelosi don’t want that. They want a doctrinaire liberal coalition to pass only progressive legislation.
Too bad for them. They ain’t gonna get that.
sinz54 // Feb 10, 2010 at 11:07 am
Mandos: 90% taxes on income above, say, 250K would do it. It would *force* investment rather than bonuses
We used to have a 90% tax before the JFK Administration. He lowered it to 70%, which was still pretty high.
But that didn’t “force” investment in the private sector, as you’re claiming. Rather, studies show that the wealthy bought tax-exempt bonds, or put the money in overseas tax shelters in the Cayman Islands or elsewhere.
And all that money flowing into tax-exempt bonds wasn’t used by cities and states to build infrastructure and capital goods. Rather, it went into welfare handouts and graft. And the Cayman Islands became fabulously wealthy, not America.
I agree with you that low personal marginal tax rates may not stimulate investment. But low capital gains rates should. Other countries, like Singapore, have ZERO capital gains taxes. If you invest in a business, and that business expands, makes a profit and hires more workers, you can keep all the profits accrued therein.
Mandos // Feb 10, 2010 at 11:18 am
rbottoms: Uh, when did someone making $250,000 a year become middle class?
I believe we’re agreeing? I think that 250K is rich, thank you very much. I am willing to concede—because American culture demands it—the existence of rich people, so in my scheme, people will be permitted keep proceeds of labour up to 250K, even though at that point their labour is probably overvalued with rare exceptions.
balconesfault // Feb 10, 2010 at 11:20 am
Olympia Snowe tried to work with Max Baucus on health care reform for months, before Reid stabbed her in the back.
I’m sick of this one. Tell me how what was in the healthcare bill that came out of the Senate (besides the Cornhusker Kickback, which wouldn’t have even occurred had Snowe signaled she wouldn’t filibuster a bill without a public option) Snowe had a right to filibuster, based on her previous statements. Meanwhile, you bring up the Wyden-Bennett compromise – in the words of Ezra Kline If every Republican who has co-sponsored HAA would commit to voting for it, the plan might pass. But they haven’t. There is absolutely no reason to believe that any Republicans would vote for a Wyden bill, or even not filibuster it.
It’s kind of funny to see you Healthy Americans Act, Sinz, in that it would have effectively destroyed employer provided healthcare … and if I recall one of your primary objections to the public options was that you saw it leading to the elimination of employer provided healthcare. Meanwhile, I’m sure that Republicans would immediately begun demagoging about Dems destroying the system that provided most Americans coverage, and would largely have voted against it. After all, with their reversal on cost control for Medicare, why would Democrats trust them in the least without an iron clad committment?
As for the others – Frum carries no clout in the Republican caucus.
As I said before. There is no Republican who can deliver any Republican votes after a compromise. Center rightists aren’t nihilists, but they’ve bought in wtih the nihilists hoping that people will give them power back just before the train goes over the edge … and that they’ll have enough time to stop it. Otherwise, apparently going over the edge is less bad than not being in power.
Mandos // Feb 10, 2010 at 11:29 am
And so, no one ideology explains everything or gives you all the answers to everything. The previous attempts to create these great cyclical theories of history that would explain civilization’s past and future (Adam Smith, Karl Marx, Oswald Spengler) have all been found to be significantly flawed, if not outright failures.
For myself, I think that ensuring that all policies are thoroughly grounded in reality, never denying uncomfortable facts nor scientific theories with unpleasant philosophical implications, is a great first starting point.
I’m sorry, but there are policy combinations that are in reality actually impossible and self-contradictory. For example, here is one combination: a health care system that satisfies all three of these conditions,
a. It has a majority component of for-profit insurers.
b. It remains affordable to the large middle class of a developed country.
c. Costs are not controlled by government fiat.
This doesn’t exist, but it’s exactly what the alleged centrists—real, existing American congressional “centrists”—have been demanding in one form or another. The world over, governments sacrifice at least one of these to have a sustainable system.
It’s the same with taxes. You can’t claim to have a taxation system that punishes the middle class and permits a high concentration of liquid wealth while not also continuing the slide into a neomedieval dystopia (of the manner one might see in Octavia Butler’s Parable of the Sower, excellent and prophetic book fully consistent with current trends in the USA).
Mandos // Feb 10, 2010 at 11:43 am
But that didn’t “force” investment in the private sector, as you’re claiming. Rather, studies show that the wealthy bought tax-exempt bonds, or put the money in overseas tax shelters in the Cayman Islands or elsewhere.
And all that money flowing into tax-exempt bonds wasn’t used by cities and states to build infrastructure and capital goods. Rather, it went into welfare handouts and graft. And the Cayman Islands became fabulously wealthy, not America.
Even this would be better than the malinvestment created by a very wide gap in income levels as we’ve lately seen.
As for the dubious nature of the benefits of lowering marginal tax rates, Orszag has something to say, particularly regarding the Bush tax cuts. Essentially, the current US tax regime soaks the lower middle class. Eli Lehrer proposes to soak it even more.
Mandos // Feb 10, 2010 at 11:43 am
Anchor tag fail.
Mandos // Feb 10, 2010 at 11:48 am
My Orszag link, in an easier-to-click context!
JonF // Feb 11, 2010 at 10:27 am
Re: I suggest you try living on $30K. And oh, by the way, folks making $30K generally don’t have employer paid health insurance
Can you show some stats that verify your claim? Last time my salary was under 30K (1995) I most certainly did have employer-provided health insurance- in fact it was better than what I have now.
balconesfault // Feb 11, 2010 at 2:27 pm
For what it’s worth – $30,000 today can be inflation adjusted to $21,400 in 1995.
And most insurance in 1995 was better than today … and less employers had dropped healthcare coverage due to rising premiums back then.
JonF // Feb 11, 2010 at 8:45 pm
My first “real” job out of college paid just 24K (in 1993)– and also had good insurance. I would not have wanted to try to support a family on that income. But it was possible to support oneself (and a cat) on that salary.
kevin47 // Feb 11, 2010 at 10:45 pm
“Add 1 percent tax to folks making $30K?”
Sounds good.
“Before recommending this, I suggest you try living on $30K.”
Been there. Wasn’t bad.
“And oh, by the way, folks making $30K generally don’t have employer paid health insurance, so be sure to throw health care costs into your budget.”
Do you have evidence that this is true?
“I personally would rather make $250K and pay an extra 1 percent than make $30K.”
Irrelevant, unless you intend taxes to be punitive.
“Before beating the drums about taxes kill investment, I recommend you read the posts at interfluidity.com”
No. Make the arguments yourself. I am capable of doing so.
“way too much of the investment dollars out there are not going into instruments that help grow the economy – in fact way too much goes into those instruments that got us into our current fiscal situation.”
So eliminate government investment. Is this your argument?
balconesfault // Feb 12, 2010 at 2:35 am
“I personally would rather make $250K and pay an extra 1 percent than make $30K.”
Irrelevant, unless you intend taxes to be punitive.
No – he was simply expressing his belief that someone making $250K and paying an extra 1% in taxes is still far far better off than someone making $30K.
This isn’t a question of fairness. It’s a question of policy, and what do you want taxes to accomplish.
First off, taking more in taxes from the many people out thre making $30K increases the chances that somewhere down the line society is going to end up making outlays to provide extra services (food assistance, medical coverage, housing assistance, college financial aid) to the family of the $30K breadwinner. So you’ve really accomplished little or nothing from a deficit reduction perspective in the long run.
Second, the many people with the $30K incomes as a class are far more likely to cut spending in response to their tax increase than those with the $250K incomes. This cut in spending harms our economy.
The counter-argument is those with the $250K incomes are more likely to invest. From where I sit, however, when our economic bubble just burst in 2008 we didn’t exactly have a shortage of investment going on. Instead we had about $45 trillion invested in something called credit default swaps … and the last time I looked credit default swaps didn’t create significant numbers of jobs for Americans, or do bupkis to improve our balance of trade.
Can anyone tell me why I shouldn’t believe that greater tax cuts to the wealthy class in America over the last 10 years (and I will note we’re in the top 5% of family incomes, thank you) wouldn’t have just resulted in $60 trillion or $70 trillion in credit default swaps before the mess finally blew up … rather than having translated into the types of job creating investments that we always claim tax cuts will stimulate?
No, this isn’t about fairness, or punitive taxation. It’s about finding a level of taxation that will sustain our budget and our economy. And putting more of that burden on low wage workers will be more likely to boomerang into long term negatives than anything else.
Rockerbabe // Feb 12, 2010 at 2:28 pm
The rich and greedy and reckless have caused so much pain and misery for regular working people in this country, that “soaking them with taxes” is the least we should do. If it were not for their greed and shortsightedness, citizens who actually work for a living would be able to contribute to the tax revenues that build our schools, build and maintain our roads and support the mirad of programs that make our society a better one than found in 3rd world countries.
Do the greed of the rich, we have foreclosures at record highs, reduced tax revenue for all sorts of things, millions of people without medical insurance, record numbers ofhomeless, record numbers of those who are hungry. And you think we should give the rich a break! I don’t think so. There is a price to pay for reckless disregard, sloth, greed and avarice; I think the rich should pay big time.