President-Elect Obama, Tax The Rich To Keep Deficits Lower

I continue to be amazed at the moral obscenity underway in our country. We are in a financial crisis, states are cutting education and health care, and we are wringing our hands over federal deficits -- yet there is no serious discussion about significantly taxing the rich, who have reaped hundreds of billions of dollars in the past decade. Yesterday, President-elect Obama talked about potential trillion-dollar deficits. I hope he will soon talk about demanding that the rich help soften those deficits by giving back some of their gains to keep the country from collapsing into an economic depression.

A few initial comments. First, I am among those who believe that we have to err on the side of spending a lot to get people back to work and I applaud the president-elect and his team for apparently leaning that way. It is, in fact, a good sign that the president-elect has succeeded in shifting the debate so significantly that the minimum number being considered for the stimulus is in the range of $500 billion, with the top number reaching one trillion dollars.

Second, I have also been in the camp that doesn't worry much about deficits -- as long as the country is spending money on something worthwhile and something that bears fruit in the future (i.e., I would hate to have a budget surplus while we are blowing up Iraq but have no problem racking up deficits if we are building schools, funding health care and financing climate-saving technologies). Having said that, I get that this is really a function of how big the fiscal deficits are relative to our overall GDP and that we can't simply ignore the costs of borrowing long-term to pay off...sovereign wealth funds.

But, here is what concerns me in the president-elect's remarks:

President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of "trillion-dollar deficits for years to come," a stark assessment of the budgetary outlook that he said would force his administration to impose tighter fiscal discipline on the government.

And...

Mr. Obama declined to say on Tuesday whether the budget that his administration submits to Congress in February would be larger than the $3.1 trillion budget that President Bush submitted for the current fiscal year. He also did not offer any specific examples of how spending could be controlled, saying only that his advisers had been scouring the budget looking for programs that could be eliminated.

"I'm going to be willing to make some very difficult choices in how we get a handle on his deficit," Mr. Obama said. "That's what the American people are looking for and, you know, what we intended to do this year." [emphasis added]

When a political leader says the country will have to make some "very difficult choices", history instructs us that it is average people that get nailed. And it doesn't have to be that way.

The fact is that, at the federal and state levels, we can have the resources to do what needs to be done, avoid "very difficult choices" and keep deficits in a range that will keep the deficit fear-mongers muted.

But, only if we are willing to tax the richest people in America. I recently outlined what could be done just in New York State to deal with the state's deficits.

The federal tax solution is just as clear. Back when the president-elect was a candidate, I looked at his economic proposals. On taxes, I wrote:

He proposes a $250 immediate tax cut for 150 million workers and their families -- $50 lower than the recent Bush Administration's $300-a-person tax "rebate" that was widely derided as a political ploy that would do very little to alleviate the economic stress facing workers. And, if economic circumstances get worse -- a word on that in a moment -- the new Administration will send another $250 per person. The cost to the U.S. Treasury would be $70 billion if both $250 rebates were implemented -- a likely scenario given the economic crisis underway.

But, the truth is that the proposed tax cut is a distraction and an unnecessary drain on the U.S. Treasury when far more important challenges face American workers. Tossing American workers a few hundreds bucks out of the Treasury, which will further hobble the government's ability to do its job, will undercut the ability to launch national health care, fund infrastructure projects and move the economy towards a carbon-free future.

And, now, with the proposed tax cuts reaching $300 billion, it is even more unadvisable to be handing out money, in my humble opinion, that should be directed towards investment in job creation.

The main point, though, is this. By asking the rich to pay more, with very little trouble, we could have hundreds of billions per year to fulfill society's needs -- and that money would not come from 95 percent of the people. It would come from the top 5 percent of income owners, and, mostly, from the top one percent. During the campaign, candidate Obama pledged to return the top rates to the Clinton-era rates. That isn't enough.

With the help of Citizens for Tax Justice, the premier non-partisan organization focusing exclusively on tax issues, I concocted an alternative tax structure: raise the top income tax rates to 40 percent and 45 percent (the top rate is now 35 percent for married taxable income above $351,000), add a top rate of 50 percent for those people with taxable income higher than $1 million and -- this is crucial -- tax investment income as ordinary income (the proposal also assumes that Congress will fix the Alternative Minimum Tax, which costs the Treasury money).

From this plan, we would realize an additional $211 billion in net revenues, with 91 percent of those revenues coming from the richest one percent of Americans (and, the above model should be adjusted to eliminate tax reductions for the higher income earners).

Here is the table:

Though the "free marketeers" (yes, the bankrupt philosophy that got us here in the first place) will argue that taxing the rich now is bad for the economy, in my opinion, there are zero -- zero -- serious arguments to back that up at the levels I'm suggesting. Frankly, the above chart is a relatively modest proposal, given as a taste of reality. We could -- and should -- easily raise the two new suggested top rates higher, with the top rate for the richest 1 percent set at least at 50 percent. From 1951-1964, the post-war era, which America's leaders and pundits like to point to as the beginning of a great boom and growth in the country, the top rate was 91% for married couples making $200,000 and up.

I'd throw in another thing that can raise another $150 billion a year: a very tiny "thank you for playing" fee on Wall Street stock transactions. Tiny means 0.25 percent. Something so miniscule that the small investor wouldn't even notice it. The lion's share of the income would come from the big traders and speculators who move millions of shares a day in an attempt to jump on any gyration in the market.

These traders benefit from government protections, not the least of which is a regulatory system (oh, there you go again, using that "regulation" word, which now seems to be back in vogue) that prevents, in theory, fraud and crazy speculation (ok, so that doesn't always work out well all the time). Plus, such a tax might also exercise some restraint, perhaps modest, on the wild and crazy big trades made on rumors and the thirst for a quick buck. My colleague Dean Baker has made this argument in far more detail here.

Bottom line: there is no need to cut government service if we go, as Willie Sutton used to say, where the money is. I hope the new president consider a serious hiking of taxes on those people who should demand that people pay their fair share of the dues that should be paid to live in this country. Freedom isn't free and wearing a flag lapel pin is a virtually cost-free act of patriotism that is 100 percent fashion statement and zero percent real investment in the country.

Comments

[FearlessFreep]

What with the recent fall in oil prices, now is also the time to introduce a carbon tax. Washington could introduce a $1/gallon tax on gasoline and it would still be much cheaper than last summer.

[MontanaMaven]

As usual, Jonathan, you make too much sense. We need money. In the past, we taxed the super rich. Eisenhower at 92%, Roosevelt and Truman at 82-94%. Nixon at 70%.
I just heard some corporate shill on NPR say that we can't burden our poor children with deficits. Boo, Hoo!
No we can't burden them with deficits, but we can starve them, keep them unhealthy, and when they get just old enough send them off either to war or to Wal-Mart. Can I have some fries with that baloney?

[ORSunshine]

It makes sense to me -- especially as all the big-wig CEOs conduct massive layoffs instead of taking personal salary cuts in order to appease shareholders. I just really don't think that those top 1% earned or deserve to have that wealth in the first place, and they were likely beneficiaries of our insane financial regulatory process in the first place.

[BobLablah]

If a 50% tax rate is good, why not go to 75% and really rake in the cash?

PS: This is sarcasm. The idea that high tax rates don't hurt the economy is moronic. The idea that government spending is at a perfect level and should not be cut is even dumber.

[LeftRight]

You're partly right Bob, we should cut some spending. Of course I think that you would disagree with me on the AREA that we should cut spending since we are already spending WAAAAAAAAAAAYYYYYYYYYYYYYY too much on the military industrial complex.

And as for the idea that high taxes hurt the economy, show me. I ask for you to show me because I can show you MUCH more that LOW taxes actually hurt the economy!

[CVN65]

LR-unfortunately for you, military spending is one of the few areas the Feds are actually allowed to spend money on. The Constitution allows for no redistribution of wealth, nor for health care, education, foreign aid, farm subsidies, bailouts, etc. If you need prrof that tax cuts work, google the "Laffer Curve" and also examine the stunning increases in collections after Bush, Reagan and *shock* JFK lowered tax rates. You may wish not to notice that, as tax rates go down, the rich pay greater and greater portions of the total. Doesn't really fit with the liberal mantra of the rich not paying their share. Anyway, once somebody reaches that point at which they are laboring more for the gummint than themselves, why continue to work? What would ne the point?

[davism97]

The 50% tax rate would only apply to our nation's highest earners. The only thing that would effect is their standard of living (they might have to cut back on private jets and mow the lawn themselves for a while).

It's moronic to suggest that wouldn't help the economy since our government would be getting much needed funds to pay for needed public services.

[LeftRight]

It would actually be better to go back to the Johnson tax rate of around 70%.....

[RLewis]

If they have to mow the lawn themselves, well then, you've just put a person who really needs a job out of one. It only takes a little imagination to extrapolate this into what will happen if you over tax the rich. There is no economy if you take away the money from the only ones left who have any. I agree that their rate needs to go up, but you just can't do that now if you want to get out of this recession. And there are no walls that will keep their money in this country if you make life Tasini hard for them. Talk about a Lose-Lose plan.

[FearlessFreep]

Don't worry about the super-rich being forced to pay 50% rates. They can afford accountants who know the tax shelters.