Wednesday, April 13, 2011

The Debt Crisis and Deficit Elimination - raising tax rates is not a bad idea!

From the Congressional Quarterly (CQ) Daily Briefing email I got this morning:

“The three biggest tax expenditures, though, are presumably politically untouchable: The exclusion for employer-paid medical insurance, the exclusion for retirement savings and the deduction for mortgage interest. Combined, they result in almost $500 billion a year in lost IRS revenue.”

This talk about possible reduction or elimination of so-called Tax Expenditures (i.e. personal deductions, corporate tax breaks, and general loop-holes) has figured prominently in a series of comment back and forth that Mike and I have been engaged at over in Ames’ corner of the world. Like many conservatives, Mike doesn’t want to raise taxes on the wealthy, unless we raise EVERYOBNE’s taxes or close EVERYONE’s loopholes. Unlike most conservative and Republican Politicians (Tea Party and not) Mike is willing to acknowledge that revenue is a part of the problem.

I mention this, because one part of our discussion that I have thrown on the table is Effective Tax Rates. Simply put, through 2007 (which is the latest year the IRS has data for publically available) the top 400 income earners in the nation paid . . . 16.5% in federal income taxes. They did that because they generally have a lopsided compensation/income portfolio that leans toward investment income, which as “capital gains” is taxed at 15%. What’s really interesting to me is that the “typical American” earning $50,000 only pays slightly more in effective federal taxes at 17.5%.

Salaries and wages, the source of income taxed at the blue line, represented only 6.5 percent of these filers’ income. Nearly two-thirds of their income comes from capital gains, and this is why you see a much tighter coupling between the orange and red lines.”

Emphasis mine.

So, when you hear conservatives say that raising taxes will eliminate our national economic growth, or that it is unfair to the rich, remember – if you have a median (i.e. 50% below you and 50% above you ) income in the U.S. you are probably paying a higher effective rate then the rich. As the Motley Fool puts it:

If your income moves into a higher tax bracket, Uncle Sam will take a bigger slice of all of your taxable earnings, right? Wrong.”

What does this mean for the current debate about both the 2012 federal budget and the debt limit increase? Simply this, if you do, in fact, raise the top marginal tax rate to 39% from its current 35% - where it was during the Clinton years – not only will you gain more revenue, you will in fact do so without real damage to those at the top because they do not pay 35% on their total income. That means you will still have plenty of money in their hands (the top 1% of income earners in the U.S. control 40% of the wealth) should they choose to invest it in American businesses and therefore create American jobs.

Will it raise as much money as getting rid of the three biggest loopholes mentioned by CQ above? Probably not, but recent economic studies indicate that if you raise the capital gains tax rate from 15% to 20.6% (therefore actually taxing the money that Americans richest people receive) you will raise revenues by 3% of GDP. Since U.S. GDP in 2011 is around $14.119 Trillion that would equal a $423 Billion increase in tax revenue, all the while leaving a TON of cash lying around for the Republicans much loved but factually implausible “Trickle Down Economics.”

Problem is, that won’t really solve the battle, which as Harold Meyerson pointed out today, is about whether the Southern or Northern economic model will ultimately guide America.


Mike at The Big Stick said...

I wonder, how many of those at the top who are hording all of that money are actually heads of sub-chapter S corporations and LLCs reporting their profits as personal income due to changes in the tax code?

Also, if we can get to fiscal solvency by simply closing the loopholes in our existing tax code, isn't that enough?

Philip H. said...

it would be, but the biggest total I can find is $1Trillion - and I think that is too high. Even if we could raise that much money, I think there would still be two problems - first we'd still be short between $300 Billion and $600 Billion just for this year, and more in future years; and second, I believe history shows us that certain segments of the American economy will actively fight such actions. Otherwise the wild profits paid to hedge fund managers who were part of driving the economy off the cliff by their extremely risky behavior would already be paying a top marginal rate of 35% not 15%.

Mike at The Big Stick said...

Well it's as I said yesterday - I refuse to accept the premise that we can't close all of the loopholes. I think that coupled with true spending cuts in non-discretionary areas would get us where we need to be.

Philip H. said...

then you need to run for office. I'm saying that to needle you or be factious, but the actual voting and policy record of your Party is one that protects loopholes for business and certain income segments. I have seen nothing from them in recent days that suggests they will abandon those approaches.

Mike at The Big Stick said...

But the Left is also protecting a lot of loopholes for the middle class. The effective tax rate for the middle class is well below the actual rate as well. How many billions (trillions?) in tax obligation is being evaded by the middle?

Philip H. said...

Here's another perspective on the issue: