Debt and Taxes: This is No Time to Cut Federal Spending

Last Updated Apr 12, 2010 5:12 PM EDT

My colleague (and stalwart editor) Cait Murphy says the U.S. urgently needs to reduce the federal deficit, and she argues in favor of a value-added tax as a good way to rein in spending. Exhibit A in that argument is that the national debt is spiraling out of control; Exhibit B is that rich people and corporations can't afford to share more of the economic burden. She writes:
The U.S. already has one of the world's highest corporate tax rates, so there is not much wiggle room there. And for all the fun associated with class warfare, the fact is, the rich and near-rich already pay the vast majority of income taxes.
Here's why I disagree. First, as the N.Y. Times's David Leonhardt has noted, the nation's total nonfinancial debt isn't growing especially fast by historical standards. And that's counting the recent growth in federal expenditures. Not that rising budget deficits aren't a concern -- they are. Just not immediately.

Besides, during the recession U.S. households and businesses have slashed spending. If Keynes is right (and recent history emphatically suggests he is), then the only way to fill in the resulting hole in the economy is for government to boost outlays in order to stimulate growth. Of course, there's precedent for doing the opposite -- it's called the Great Depression.

Second, for all the fun associated with "class warfare," seizing on the fact that rich people pay the the lion's share of taxes sounds suspiciously like class warfare, in this case against anyone who's not "rich or near-rich." Because that's exactly how a progressive system is designed to work -- people higher up the income ladder pay more taxes. One can dispute the merits of that approach (and flat-taxers, in particular, do). But suggesting that this distribution is inherently unfair is itself a political stance. Not that there's anything wrong with that.

Yet while we're at it, it's also helpful to keep in mind that the tax burden on the richest Americans has plunged in recent decades. By contrast, rates for average people have stayed virtually flat. Writes Andrea Orr of the Economic Policy Institute:
The top households saw their effective tax rate decline almost 10 percentage points, from 26.4% in 1992 to 16.6% in 2007. By comparison, the average household saw effective tax rates decline less than one percentage point, from 9.9% in 1992 to 9.1% in 2006, also the last year for which data are available. The change in tax rates over time shows that while the United States still has a progressive tax system in which those with higher incomes pay higher tax rates, it is a lot less progressive than it used to be.
The dwindling tax load on the super-rich also must be understood in context of their rising share of national income. Since 1980, nearly 35 percent of all income growth has gone to the top one-tenth of 1 percent of all earners in this country, according to EPI. The bottom 90 percent of people have drawn less than 16 percent of income growth during this period (click on chart to expand).

Indeed, wages for the vast majority of Americans have stagnated over the last 30 years, even as U.S. productivity has continued to climb at normal rates. Meanwhile, although non-richies pay less in income tax, they contribute proportionately more in sales, payroll, and state and local taxes, which are significantly more regressive than the income tax.

Cait's right in saying that the U.S. has the world's highest tax rate for corporations. But that doesn't exactly mean that most American companies, well, pay any taxes at all. Between 1998 and 2005, nearly two-thirds of U.S. companies paid no federal income tax, according to the GAO. Not one cent. One doesn't have to be a wild-eyed radical to question if there might be a bit more "wiggle room" on corporate taxes than she suggests.

In some ways, of course, such discussions are academic. Unemployment is likely to remain high at least for the next year, or even longer, judging from the length of previous recessions. Foreclosures are soaring. Small business are hurting. The feds have no choice but to spend -- not on principle, but because economic necessity demands it.

Chart courtesy of Economic Policy Institute
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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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