Why Raising Taxes on the Rich Is Good Economics

Last Updated Aug 8, 2011 6:10 PM EDT

Although Americans' dim view of Congress is usually attributed to their disgust with the political process, there's another reason why folks are unhappy: Washington doesn't give a hoot what they think.

Take taxes. Poll after poll show that people favor higher taxes to reduce the deficit. That's because, while susceptible to demagoguery, most of us aren't total idiots. The case for balancing the budget in part by raising taxes on top income-earners is compellingly simple. Better yet, it's good economics.

As this new analysis from think-tanks the Economic Policy Institute and The Century Foundation lays out, there are at least 10 reasons to raise tax revenue from the highest-earning households:
  • Meager revenues and Bush-era tax cuts contribute greatly to the deficit.
  • Even if taxes on those with the highest incomes are substantially increased, income gains at the top over time would still dramatically outpace gains among the rest of the population.
  • The top one percent of households benefited disproportionately from the Bush-era tax cuts.
  • Recent income gains for the highest-income one percent have far exceeded gains for everyone else, leading to dramatic income concentration at the top of the scale. Now, more than ever, the highest-income households are in a better position to pay taxes.
  • Wealth is even more concentrated at the top than income, and the main wealth tax--the estate tax -- has been sharply reduced in recent years.
  • Reasonable proposals for taxing the highest-income households can raise significant amounts of revenue.
  • By not taxing the highest-income households, deficit reduction relies too heavily on spending cuts that harm low- and middle-income Americans.
  • Raising taxes on the highest-income households reduces the deficit without having much impact on the economic recovery or job growth.
  • Few small business owners have exceptionally high incomes, and thus few would be affected by these tax increases on the highest-income households.
  • The progressivity of the federal income-tax system offsets the regressive nature of federal payroll taxes and state and local tax systems.
Why tax hikes wouldn't hurt small business
With a congressional supercommittee preparing to take an axe to government spending, Republicans have sworn to fight tax hikes at all costs. If the goal is to curb the deficit, rather than to serve wealthy constituents, this is madness. For instance, if they are allowed to continue, by 2019 the Bush-era income-tax cuts would account for roughly 43 percent, or $5.4 trillion, of the total deficit.

As a frame of reference, that is three times the cost of the 2009 stimulus package, TARP and all the other economic fixes adopted to combat the recession. By contrast, phasing out those breaks for the top 2 percent would save some $838 billion over 10 years without raising taxes on anyone else. That includes the vast majority of small businesses, which happen to create most of the new jobs that will be necessary to nurse the economy back to health. According to the Tax Policy Center, only 3 percent of the 20 million individuals in the U.S. who report business income fall in the top two income brackets.

Economists across the political spectrum agree that gutting spending on education, transportation, jobs training and other federal programs is likely to hurt U.S. economic growth. By contrast, as the EPI/TCF report notes, recent estimates show that permanently extending the Bush tax cuts would generate only 35 cents of economic "bang" for every buck in lost revenue. If you favor driving the country deeper into debt, that's a sure-fire way to do it.

The numbers also show that imposing a small tax increase on the 1.9 percent of the population with annual income of at least $200,000 would have only a limited impact on the economy (and for obvious reasons -- such people earn enough to keep spending even if their taxes do rise).

Supercommittee members are unlikely to let such data points intrude on their talking points, of course. But like most Americans, I wish they would.

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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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