With a March 1 deadline looming for the imposition of the automatic spending cuts known as the sequester, President Obama and his allies in the press are stepping up their campaign for additional tax increases on the rich.
Obama said over the weekend that his plan "asks more of the wealthiest Americans," and he said it looks like Republicans are "prepared to inflict more pain on the middle class because they refuse to ask anything more of those at the very top." The president's allies at The New York Times issued an editorial under the headline "Why Taxes Have to Go Up," insisting, "To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness."
Here are five reasons Obama and the Times are wrong about this.
Taxes are already high. Californians this year face a combined federal-state income tax rate of 51.9 percent on earnings over $1 million, and upper-income New York City residents are taxed at a 51.7 percent combined city, state, and federal rate, a phenomenon that even the Times itself recognized earlier this month as front-page news. Government, in other words, is already taking more than half of every marginal dollar earned.
The Times editorial claims that "Even with recent increases, the new top rate of 39.6 percent is historically low." It justifies that claim with a hyperlink to a table that says "Note: This table contains a number of simplifications and ignores a number of factors…Perhaps most importantly, it ignores the large increase in percentage of returns that were subject to this top rate." That disclaimer isn't mentioned in the Times editorial. Nor is the fact that, according to the table to which the Times links, in 1988 and 1989, the top rate was 28 percent, or that in 1990, 1991, and 1992 it was 31 percent. In addition, speaking of history, the Medicare payroll tax didn't apply in the pre-Medicare days. America didn't have an income tax at all, with rare wartime exceptions, until the Sixteenth Amendment was ratified in 1913.
Raising rates higher than current levels would be impractical. The higher rates would so encourage tax avoidance and discourage extra work that the returns in increased government revenue would start to diminish. Even John Maynard Keynes wrote that "25 percent taxation is about the limit of what is easily borne" and that "Aggressive taxation may defeat its own ends by diminishing the income to be taxed."
It's also not moral. How can Obama justify taking for the government more than half of a dollar someone else has earned? That leads us to the next objection:
Taxation without representation isn't fair. It's one thing for a group of individuals to associate themselves voluntarily and tax themselves to fund common services. But the more steeply progressive the tax code gets, and the greater share of taxation that is borne by a small, high-income minority, the more our tax system starts to look like what got Samuel Adams and company so riled up against George III and Parliament back in the 1760s and 1770s. Just as the British voted to fund their government by increasing taxes on the colonists rather than themselves, so the Americans who earn less than President Obama's definition of rich voted to fund their government services by increasing income taxes on the rich rather than on themselves. One may object that the rich have plenty of representation by way of lobbyists, campaign contributions, and independent expenditures, and that a lot of the senators and congressmen are rich themselves. But we still have a one-person, one-vote system.
The exit polls from the 2012 election showed that Mitt Romney won voters with family income from $50,000 to $99,999, by 52 percent to 46 percent. Romney won voters with family income of $100,000 to $199,999, by 54 percent to 44 percent, and voters with family income of $200,000 or more, 54 percent to 44 percent. The only income groups that President Obama won, according to the poll, were those with family income less than $30,000, which Mr. Obama won 62 percent to 35 percent, and those with family income $30,000 to $49,999, which Obama won 56 percent to 42 percent. You don't have to be a Marxist political economist to observe that Obama is trying to impose a big tax increase on a lot of people who didn't vote for him. At least those rich people got to vote, which is more than can be said for the colonists. But there's something ugly about the whole thing.
Raising taxes hurts growth. Slower growth makes the deficit bigger, not smaller. The best thing for tax revenues, for the deficit problem, and for America overall would be robust economic growth. But the government reported negative real economic growth for the fourth quarter of 2012, and there are some signs that the payroll and income tax increases that took effect in January 2013 are already inflicting more damage. Why slow an already sluggish economy by increasing taxes even more? Don't just take it from me; even Paul Krugman, the Nobel Laureate New York Times columnist, once wrote, "High marginal tax rates can hurt economic growth."
The problem isn't taxes, it's spending (and the dollar, which hardly anyone talks about). The Times editorial disputes this, contending, "Contrary to Mr. Boehner's 'spending problem' claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts… a deficit caused partly by inadequate revenue must be corrected in part by new taxes." Yet that's nonsense. Washington is awash in revenue. President Obama's own Office of Management and Budget reports that tax revenue in 2011 was $2.3 trillion. That's about $275 billion more than the $2.025 trillion that arrived in 2000, before President George W. Bush was even inaugurated.
No, the problem isn't on the revenue side. It is on the spending side; the federal government spent $3.6 trillion in 2011, about $1.8 trillion more than the roughly $1.8 trillion it spent in 2000. In other words, federal spending doubled in about a decade. Tax revenue grew more than 10 percent, but that wasn't enough to keep pace with the spending.
If there's a revenue shortfall or if the comparisons seem strange, it may have something to do with the fact that today's dollars are worth less than they were worth in 2000. Now there would be a fine topic for some congressional or presidential leadership, but the politicians, alas, seem to prefer the current set-up, under which they can deflect responsibility toward the "independent" Federal Reserve.
The tax-raising isn't going to stop with the rich. Tax increases on the rich are just the first step. When President Obama tells you he just wants to raise taxes on the rich, he's fibbing. He's already raised taxes on cigarettes and tanning salons, and he raised the payroll tax on everyone at the beginning of this year. At least The New York Times, unlike Obama, is forthright about its goals; the Times editorial called additional tax increases on the rich "a necessary precondition to what in time will have to be tax increases on the middle class," asserting, "more taxes will be needed from further down the income scale." Likewise, the Center on Budget and Policy Priorities, in a paper linked to by the Times editorial, says of the Bush tax cuts: "Letting those tax cuts lapse on schedule — for everybody, not just for people with incomes over $200,000 for an individual or $250,000 for a couple — would put deficits and debt on a sustainable path."
Republicans would be in a stronger position to fight now if some of their leaders in Congress had not, in early January, provided President Obama with votes he needed to raise tax rates in 2013 from the levels they had been at in 2012. After all, if voters think both Republicans and Democrats are going to raise taxes, they might as well decide based on other issues. If the Republicans cave again this time around, they risk losing credibility on the tax issue for another election cycle.