02/15/2012 06:54 pm ET | Updated Apr 16, 2012

It's Time to Lead on Tax Equity

One of the criticisms President Obama has faced is that he tends to wait patiently, sometimes too patiently for some, for the public to reach conclusions that seem so obvious. With the release of his proposed 2012-13 budget, the president is now continuing to use his influence to support what has now, finally, become a consensus opinion: our historically low tax rates on the very rich are unsustainable and are destroying our middle class. It's now time for him to bang the bully pulpit, and time for Congressional Democrats to put aside their timidity and join the fight.

Last October, I posted a blog entitled "What Took Them So Long," in which I asked why it had taken so long for people to actually focus on America's three decade-long trend toward financial inequality. After all, the slide had been constant and seemingly inexorable for so long. By last fall, the most fortunate 1% of Americans controlled 40% of the nation's wealth and collected 24% of the nation's income, about triple of what it was just 30 years ago. That share of income is the highest it has been since the Roaring 20s, and for the richest of Americans, that income is now often taxed at capital gains rates which are less than half of ordinary income, and about half of what the rates were when Ronald Reagan was president. The Democratic Congressional leadership and rank-and-file, so fearful of being accused of actually raising taxes, have been bullied into submission, and have gone along with the greatest redistribution of wealth in history.

Since October, a lot has happened to bring the issue of tax fairness to the forefront, and to reveal a remarkable consensus of people accross the spectrum that our most fortunate citizens need to pay their fair share of taxes. It would be nice to think that the breadth of the consensus would inject Congress, and more specifically President Obama's allies on Capitol Hill, with some backbone on this issue. Senate Minority Leader Mitch McConnell seems pretty convinced that the backbone deficit has not been cured, as he threatens to introduce the president's budget himself, safe with the knowledge that Democrats would never support it. McConnell assumes that no Democrat would dare back raising taxes on "job creators" in an election year.

Democrats should now have the guts, and the good sense, to call McConnell's bluff. Over the last six months, it has been clear that noone really believes this "job creators" baloney. Look at what has happened: First, God love them, the "Occupiers" brought the debate to the forefront, helping people realize that "we are the 99 percent." Around the same time, Warren Buffett reprised his earlier commentary about how he pays a lower tax rate than his secretary. Back in 2006, Buffett had noted that there was already class warfare in the United States, and, he noted, "my side's winning."

More billionaires have joined Buffett. Just last week, venture capitalist billionaire Nick Hanauer, who made a fortune with Amazon, argued that the policies of ultra-low taxes on the mega-rich won't boost economic growth or lower the jobless rate. To the contrary, a decade of historically low taxes on the rich had done just the opposite and continued the downward trend of the middle class. "We are systematically destroying our customer base in this country by undercutting the middle class," Hanauer says. "If it was true that the rich and business were job creators, we'd be drowning in jobs today."

Why is Hanauer right? Why has the economy struggled even though the system is full of cash? Because the cash isn't getting in the hands of Hanauer's customer base -- regular people who buy the things that a healthy economy makes, like refrigerators and ranges and air conditioners and cars. So, as I noted in my October blog, the stock of Tiffany's has quadrupled since the spring of 2009, while business at Sears has been relatively flat. People who don't need the cash or the credit have lots of it. People who buy refrigerators? Not so much. With relatively little demand, cash-rich companies have been hesitant to hire people to build more things that customers might not be able to buy. More tax cuts for rich people won't solve this problem.

Hanauer rejects the idea that he's advocating higher taxes on the rich "because I'm a good person or because I love you. Let me just be very clear. I do not love you. I value you as a potential customer and we've rigged the economic system in a way to destroy my customer base."

The other development that has brought this inequity into focus has been the release of Mitt Romney's tax returns (well, at least one tax return). Romney has now become a living, breathing example of the inequality, as he revealed that he paid federal taxes at a rate below 15%. Again, as I noted in October, those of us who work hard and have had some success -- but who work for money, as opposed to having our money work for us -- have a hard time understanding why the system rewards the governor's efforts so much more than ours. As Hanauer noted last week, if you are a small businessman earning $350,000 a year, your tax rate is 35%, while hedge-fund guys pays 15%. It's tough to get your arms around that.

The Speaker of the House continues to tell us that we need to have lower tax rates for capital gains and for "carried interest," because, without these gimmicks, the job creators won't invest. This is hogwash. Mitt Romney didn't turn down any investment opportunities in the 1990's, when capital gains were taxed at 28%, because taxes were too high. Investors will invest when there is money to be made.

Even more to the point, there is no equity in taxing people who invest at a lower rate than people who work for a living. In fact, it used to be that Republicans felt this way. It was recently noted that in the 1920s, Andrew Mellon, the Republican Treasury Secretary, forcefully argued that income from labor should be taxed at a lower rate than investment income. Mellon argued that wages are uncertain and limited by sickness or death; money will always make more money for people who have it in the first place.

It's not surprising that, in light of the debate over the last few months, sizeable majorities of just about every interest group believes that part of our long-term debt solution should be higher taxes on the people who can most afford them. Even a majority of Tea Partiers believe this.

President Obama has included tax equity, and the basic tenets of the Buffett Rule, in the budget he has now sent to Congress. The Republican congressional leadership is convinced that the Democrats in both houses are too craven to do anything about in an election year. How refreshing it would be if Democrats actually had the President's back on this.