The Rich Get Richer (Unless We Change Tax Policy)

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Today’s anti-tax conservative movement is hardly in tune with twenty first century reality. Republican lawmakers still believe in supply-side fanaticism, and are determined to keep taxes lower for the super-rich, rather than for working class and middle-income American families. Without a fairer tax system, the United States will struggle throughout the coming decades, with soaring national debt and a darkened long-term budget outlook.

According to the I.R.S. in 2007, before the economic meltdown, the top 0.1 percent of  taxpayers – those who roughly made two million dollars annually – had a combined income of one trillion dollars. It would make economical sense to ask the super-rich to pay their fair share.

Before the Reagan revolution, high-income earners were placed in tax brackets way above the top rate of 35 percent today. Nobel laureate Paul Krugman, a strong advocate for increased revenue, has estimated using Congressional Budget Office projections that taxation on high-income earners in the next decade could shave off $1 trillion from the deficit.

Other economists have urged raising taxes on the rich as a viable plan for deficit reduction. President Obama has been making a similar argument, proposing a “millionaire tax.”

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying paying taxes at a lower rate than their secretaries? It’s not fair. It’s not right,” said Mr. Obama last summer.

It is immoral to ask the needy and the middle class to bear the brunt of the economic downturn. Some of the world’s wealthiest people are calling for higher taxes on the rich. A number of France’s wealthiest individuals have campaigned for tax increases, and dozens of German super-rich citizens have argued for a higher tax rate.

Altruism does not explain this entirely. The wealthy are no doubt alarmed by social unrest caused by foolish measures of austerity. Moreover, the global rich understand that indiscriminate public cuts in vitals areas such as infrastructure and education will only undermine the future economic vitality of their respective nations.

Taxes on the rich are being promoted as a step toward economic justice at a time when governments are busy cutting social spending like pensions and health care.

But not by our Republican-controlled Congress.

To the idea being embraced by much of the modern world, U.S. Republicans say it would undercut the economy.

Until the recent financial crisis, individual tax rates had fallen substantially in most developed countries in the past decades. In 1980, the top rate was 70 percent, and many European nations were above 60 percent. Today, the United States has a top rate of 35 percent, with many wealthy Americans paying significantly less because their earnings come from dividends or capital gains, and European countries have a top rate of around 35 percent.

There is little historical evidence to support the Republican contention that higher taxes somehow undermine growth. For instance, employment and economic growth was weaker after the Bush tax cuts than they were under the high rates of the Clinton administration.

Republican lawmakers also oppose the idea of taxing financial transactions, which have soared over the decades. Over the next decade, because of the high volume of trading, hundreds of billions of dollars in revenue could be collected.

Hong Kong and Singapore have financial transaction taxes. And they are economic powerhouses leading the world in market innovation.

Increased revenue must be part of any long-term, comprehensive deficit reduction proposal. The debt ceiling debacle this past summer showed how far the Tea Party and many mainstream Republicans would go to oppose taxes on those most able to pay them.

Perhaps today’s anti-tax fanatics should look back to their supposed gospel, Ronald Reagan, who offset most of his cuts over his two terms with tax increases. He also favored treating capital gains as ordinary income.

This is unthinkable in our current political climate. It’s almost a cultural norm for both parties to regard low capital gains tax rates as a good thing. Equalizing capital gains and ordinary income is barely mentioned; if it is, legislators quickly denounce the idea.

A capital gains tax is a tax on profits an investor realizes when the asset is sold for a price that is higher than when it was purchased – the source of a significant amount of the income for very wealthy people.

Academics are increasingly acquiring research in this field to debunk the notion that lower capital gains tax rates influence behavior and economic growth significantly.

Warren Buffett, chief executive of Berkshire Hathaway, lent his support to the contentious issue in an op-ed article: “I have worked with investors for 60 years and I have yet to see anyone – not even when capital gains rates were 39.9 percent in 1976-77 – shy away from sensible investment because of the tax rate on a potential gain. People invest to make money, and potential taxes have never scared them off.”

If capital gains rates were treated as ordinary income, it would generate a vast amount of revenue for the Treasury; this is an appealing option, considering the budget deficit talks on Capitol Hill.

So there you have it, three crucial ideas to reduce the deficit over the next decade: letting the super rich pay their fair share, implement a reasonable tax on financial transactions, and tax reform, specifically capital gains. Of course, these will only make up a portion of any serious “grand bargain.” Cuts in social welfare programs, such as Medicare and Medicaid, and from the Department of Defense will have to be made over the coming years. (However, the boom, not the slump, is the proper time for fiscal austerity).

Hopefully, President Obama will continue to implement the bipartisan “Simpson-Bowles” initiatives within his political calculus. Their plan is an admirable start towards genuine discourse on our nation’s future.

In the meantime, increased revenue will help our country prosper. Anti-tax zealots have to know better.

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