Soak the Almost Rich

O.K. Can we please cut spending now?  

Mike F. 


http://www.tnr.com/article/the-vital-center/88162/obama-taxes-upper-middle-class-promise


Soak the Almost Rich
Obama made a pledge not to raise taxes on the upper-middle class. Liberals 
should hope he breaks it.
	* William Galston 
	* May 12, 2011 | 12:00 am

Because  so much of what passes for political debate in this country takes place  
in a faux-fact zone, it is a welcome change to read Reihan Salam’s latest essay 
in the National Review.  During the 2008 campaign, Barack Obama famously 
promised that taxes  would either stay the same or go down for households making 
less than  $250,000 a year. But Salam points out that there’s no way of reducing  
the budget deficit to acceptable levels, let alone financing the kind of  
federal government Obama favors, while relying solely on income and  payroll tax 
increases for households making more than that figure. Of  course, there’s not 
much that can be squeezed out of the bottom four  income quintiles (households 
making less than $100,000 per year). On the  other hand, relying solely on the 
rich for added revenues would imply  tax rates in excess of 75 percent. But what 
about the well-off but not  rich—those in the fifth quintile who earn between 
$100,000 and $250,000 a  year? Can they really be held harmless?
To dramatize the problem we’re facing, let’s consider the analysis the Urban 
Institute’s Eugene Steuerle and Stephanie Rennane published in January, which 
looked at taxes and benefits for households in  different income brackets. The 
average couple earning $112,000 and  retiring in 2010 will have paid $140,000 in 
lifetime Medicare taxes, but  is expected to receive lifetime Medicare benefits 
totaling $343,000.  Twenty years from now, the same couple would have paid 
$171,000 in  lifetime Medicare taxes and would receive $530,000 in benefits.  
(Technical note: These amounts are in constant 2010 dollars, adjusted to  
present value using a 2 percent real interest rate. In calculating net  
benefits, the authors have taken into account premiums as well as  payroll 
taxes.)
Or consider the analysis USA Today published last week,  which found that 
Americans are paying the smallest share of their  income for taxes since 
1958—23.6 percent, versus about 27 percent in the  1970s, 1980s, and 1990s. On 
average, a person making $100,000 this year  will pay $23,600 in combined 
taxes—federal, state, and local, income,  payroll, and sales—versus $28,700 in 
2000 and $27,300 in 1990. Even when  the one-year Social Security tax cut ends, 
the tax gap between now and a  decade ago for individuals making $100,000 will 
still be more than  $3,000.
Of course, you might argue we’re short on revenues because the tax  code has let 
the very wealthy off the hook in recent decades. Maybe so,  but it’s hard to see 
that in the data. According to the Urban-Brookings Tax Policy Center, the 
effective tax rate for all federal taxes in 2009 was 18.2 percent. The effective 
rates by quintile were:
Lowest                                -0.9

Second                                6.6

Third                                   13.4

Fourth                                 17.2

Top                                      22.9
But maybe the real action is within the top quintile of  income-earners, with 
the super-rich making out like bandits. Again, the  Urban-Brookings numbers 
don’t support that story:
80-90                                    19.4

90-95                                    22.0

95-99                                    23.5

Top 1 percent                       26.1

Top 0.1 percent                    27.9
This is just a one-year snapshot, of course. What about trends over  time? We 
know that the distribution of income has become less equal in  recent decades, 
with those at the top commanding a larger share. You  might think that the share 
of taxes paid by high earners has declined  during this period, shifting the 
burden to those below. But according to the CBO,  that hasn’t happened either. 
While the share of national income for the  top quintile and the top 1 percent 
has risen considerably since the  mid-1980s, their share of total federal taxes 
has risen even more.
You might still argue, however, that the right comparison is not  across time 
but across national boundaries. Surely the rich pay more of  the total tax 
burden in other advanced democracies, and we need to  become more like them. 
Wrong again. Using 2005 OECD data, The Wall Street Journal recently reported 
that the share of taxes paid by the top 10 percent in the United States  is 1.35 
times larger than their share of income. The comparable number  for France was 
1.10 times; for Germany, 1.07 times; for the OECD as a  whole, 1.11. And this is 
what we should expect, given that most other  democracies rely less on income 
taxes and more on alternatives such as  the VAT, which is less progressive.  
Finally, you might be curious about the numbers lurking behind the  abstractions 
of quintiles. I was too, so I checked. According to the  Census Bureau, the top 
5 percent of household incomes began at $180,001.  The Obama campaign pledge has 
the effect of exempting all but the top 2 percent of households from even the 
possibility of higher taxes.
How realistic is this? It’s widely agreed (even across party lines)  that if 
increased tax revenues are to be part of a long-term fiscal  stabilization plan, 
they should come via a version of the 1986 reform,  which broadened the tax base 
by reducing tax expenditures—i.e. special  tax credits, deductions, exemptions, 
deferrals, and preferential rates.  But as a recent note from Roberton Williams 
of the Tax Policy Center makes clear, it’s the well-off but not rich  (i.e. the 
top quintile excluding the very rich) that benefits massively  and 
disproportionately from itemized deductions and exclusions from  taxable income. 
In other words, while it may make political sense to  shield households that 
fall between the 80th and the 98th income  percentiles (i.e. those making 
between $100,000 and $250,000 per year)  from tax increases, we won’t raise much 
revenue if we do.
This prospect won’t trouble the conservatives, who don’t want to  raise taxes on 
anyone and are prepared to gut the federal government in  the process. But it 
should alarm moderates and liberals who believe in  public investments and the 
social safety net. Unless Obama is prepared  to tolerate huge deficits 
indefinitely, or to emulate arch-conservatives  and curb the budget deficit with 
spending cuts only, he will have to  break his unsustainable tax pledge at some 
point. The only question is  when.
William Galston is a senior fellow at the Brookings Institution and a 
contributing editor for The New Republic.
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