This was President Obama’s reply, during fiscal cliff negotiations, when House Speaker John Boehner declared, for the umpteenth time, that “ The U.S. has a spending problem.”
I can understand the president’s irritation. How could anyone believe that we have a “spending problem?’
Look around. Consider the state of our bridges, our roads and our crumbling inner city public schools. Are we spending too much on the nation’s infrastructure?
Next, think about unemployment. During this recovery we have lost 750,000 public sector jobs. Republicans are intent on “starving the beast” (of government) and as a result Washington has not given states the financial support they need continue delivering public services. Across the nation, public school teachers have been laid off in droves, while class sizes increase at unprecedented rates. Does this sound like government spending run amuck?
One in five American children now lives in poverty. Seventeen million children find themselves in homes where they can’t be sure of getting enough to eat. (a.k.a. “food-insecure households.”) At the end of the month, many kids go to bed hungry because the government Food Stamps program (now known as Supplemental Nutrition Assistance Program, or SNAP) gives families less than $1.50 per person per meal. Are we being overly generous?
During the past two wars, we sent millions of American men and women to Iraq and Afghanistan –many went back for repeated tours. In some cases, their bodies were not broken–but their minds were. Now 1.3 million Vets seeking mental health services are told they must wait of 50 days before getting treatment. A recent government report suggests that 22 Vets die by suicide every day – about 20 percent of all Americans who kill themselves. Are we spending too much on healthcare for Veterans?
Let me suggest that we don’t have a spending problem. We have a revenue problem. Current federal revenue levels are at their lowest levels since the 1950s.
How Anti-Tax Pledges Have Weakened the Nation
In a recent post, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, nailed it: “The tax system doesn’t raise enough revenue. And that’s not just the recession; it’s also tax policy and anti-tax pledges . . . The system has become less progressive, with the largest declines in effective tax rates at the top of the income scale.
A few days ago, a New York Times editorial agreed: “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, which were only partly undone in the fiscal-cliff deal earlier this year.
“And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.
“Those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes,” the Times editorial added. “Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.
“As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined.”
Think about that last sentence. It helps puts things in perspective.
Of course, this does not mean that we should ignore the waste in our Medicare system. Today, we overpay for a great many drugs and devices. And by paying providers fee-for-service, we encourage unnecessary tests and procedures that expose patients to risks without benefits. By changing how we pay for care, and rewarding better outcomes at a lower prices, we can save billions.
But the Times’ editorial reflects a growing consensus: we should pursue the reforms embedded in the Affordable Care Act calls for AND raise taxes at the top. Otherwise, we won’t have enough money to meet our obligations.
After years of neglecting our infrastructure, paring spending on education, ignoring climate change, and waging two wars, those obligations have grown.
The original bi-partisan Simpson- Bowles commission understood this. The initial budget plan released in December 2010 by former Republican senator Alan Simpson and former Democratic White House chief of staff Erskine Bowles, would have raised taxes by more than $2.6 trillion (in today’s dollars) over the next 10 years.
President Obama also recognizes that if the government is going to stimulate the economy, it needs more revenues. When he ran for a second term, his budget called for $1.7 trillion in tax increases. At the time, he pledged that he would oppose any compromise that didn’t raise tax rates on families making more than $250,000. But in the end, he agreed to a fiscal-cliff deal that raised just a little over $600 billion in revenues, while lifting tax rates only ono families hauling home $450,000 or more.
“Asking Less and Less of Those at the Top”
In recent decades, our tax system has become more and more regressive. As the Center for American Progress (CAP) observes in a recent report: “The very highest-income households have enjoyed substantial tax cuts, even as their incomes have risen. From 1979 to 2007 the pretax incomes of the top 1 percent more than tripled, while their tax rates declined by about one-fifth.”
“It is important to remember that the federal income tax is only one piece of a larger national tax system,” the authors of the CAP study add. “Most of the other pieces—excise taxes, payroll taxes, state and local taxes—ask much less of high-income households than they do of low- and moderate-income households. Taken together, our national tax system is already less progressive than it might appear –which is one reason why it’s so important for the federal income tax to be substantially progressive.” (For CAP’s proposals for raising taxes seeTable 1 of the report.
A Brief History of Tax Rates
Here it is crucial to distinguish between “marginal tax rates” and “effective tax rates”—what people actually pay. In the ‘Seventies, the top marginal rate for the very wealthy was 70%. In the ‘Eighties, it fell to 50% and stayed there until 1987, when an era of tax breaks for the rich began. In the1990s, rates rose, but never broke 40% and as a new century begain President Bush once again slashed rates. By 2012, the marginal rate at the top had plunged to 35%.).
“Hold on,” say conservatives. Back in the ‘Seventies and early ‘Eighties, they point out, the wealthy enjoyed some extraordinary tax shelters. This is true. Prior to the Tax Reform Act of 1986, I recall writing about elaborate schemes that let people avoid taxes by investing in race horses, and if memory serves, there was a deal that involved trafficking in human blood. Maybe Warren Buffet sent 70% of his income to the IRS, but if so, he was one of very few.
Republicans argue that this is why we should ignore “marginal rates,” and look at “effective rates” (what people wind up paying after deductions and shelters. )
They are right. But when you focus on what people actually pay, you discover that: the wealthy are asked to pay a much smaller share of their earnings than they did in the past—even while their incomes ballooned. In 1979 those sitting on the top step of a hundred-step income ladder paid an average of 37% of their incomes in federal taxes; by 2011 they were parting with just 29.5%.
Consider what it would mean if you earned more than 99% of your fellow Americans, and lower rates let you save 7.5 % of your income (37% minus 29.5%), year after year, for 34 years. Now imagine those dollars compounding.
Moving Tax Policy to the Right
Last month former Bush administration Congressional Budget director Douglas Holtz-Eakin observed: “Beginning with Ronald Reagan’s Economic Recovery Tax Act, conservatives have waged a 30-year war over low tax rates” and, he added, “it looks like conservatives have won the war. . . Now, it is time to wage the next war: entitlement spending.”
Republicans believe they have won the tax war because when it came to raising taxes for the top 2% (individuals earning more than $200,000 and families with incomes over $250,000), President Obama caved. “This is the success of the radicalization of the right,” observes CAP president Neera Tanden: “Everyone moves right to appear in the middle.”
But I would suggest that Holtz-Eakin and McConnell postpone putting on their party hats. At the end of 2012 polls showed that 61 percent of Democrats– and fully 48 percent of Republicans– believed that the Bush tax cuts for individuals earning over $200,000 should expire.
The Public Weighs In
A few days ago, a new Bloomberg poll revealed that three out of five Americans back raising taxes for high-earners and corporations. (Majorities also favor overhauling entitlements, but with cuts targeting wealthier Americans.)
Clearly the tax issue is far from resolved—at least if you assume that Congress cares about what voters think. I recognize that some conservative legislators believe that they are in Washington to represent “principles”—not “the people.” But I remain convinced that a significant share of Republican Congressmen realize that their party is in trouble. This is why they have done an about-face on immigration: they hope to court the Latino vote. If roughly half of Republican voters disagree with them on tax cuts for the top 2%, they may need to re-think their position on this issue as well.
Americans are becoming increasingly aware of economic inequality. Over time,the merely rich have become super-rich. Meanwhile, the upper-middle class has become middle-class; the middle-class has become working class, the working class has become poor, and the poor have become homeless. The widening gaps that divide us undermine not only our economy but our society.
As Jared Bernstein observes: “this is where the legitimacy of the tax code—a critical issue in a democracy—comes into play. If average folks feel like the economically privileged can get a much better deal out of the tax system than they can, that system will lose legitimacy and that is, of course, a real risk today, one that was highlighted in the recent election.
“To tie this to a concrete policy, when we privilege a particular unearned income and debt financing over paychecks, we’re chipping away at legitimacy. Now, there could be good reasons for accepting such a tradeoff, e.g., if such favorable treatment led to faster growth and more investment. But it doesn’t. And this is a real problem we could and should fix.”
Granted, growing inequality in this country is not mainly a matter of an increasingly regressive tax system. Wealthy Americans also have seen both their incomes and the value of their investments in stocks and real estate spiral. Over the same span, middle-class wages stagnated But tax cuts for the wealthy have made the problem worse.
Why Tax Increases Must Target the Rich
Republicans suggest that if taxes are going to rise, the middle-class should share in the increases. In theory, this sounds reasonable. But if conservatives looked beyond their theories to the facts, they would recognize that, today, after paying federal, state and local taxes, 90% of American households–those on lower 90 steps of that 100-step income ladder are just squeaking by. Over the past thirty years, their share of the nation’s prosperity has declined.
It wasn’t always this way. From 1940 through the late 1970s, 90% of U.S. households shared in roughly 65% of the wages and investment income that the nation enjoyed. But since the early 1980’s, their piece oft the income pie has shrunk to about 50%.
Recently, things have gotten worse. From 2007 to 2011, average income for an individual in the bottom 90% fall from $35,173 to $30,370.
Let me be clear: I am not arguing that households earning over $250,000 should shoulder the full l burden of funding this nation’s future obligations. Without question, families earning more than, say, $150,000 could afford to contribute at least slightly more. But we don’t want to raise their taxes in the middle of a recession: economic recovery depends on these affluent households spending more.
Why Most Americans Cannot Afford Higher Taxes
Going forward, we cannot, and should not, raise taxes for what I would describe as “the broad middle-class”–which includes families living on less than, say, $100,000 to $125,000. Given rising prices for the necessities of life—which include education, food, utilities and transportation—these families are struggling to try to send their children to college. Meanwhile parents don’t have the discretionary income needed to build a nest egg for their own retirement.
If we squeeze them, fewer children will get the educations they need, and we will fall further behind in global competition. And if parents in this group can’t save for retirement, taxpayers will wind up shelling out more to support them in their old age.
Make no mistake: I am not arguing for “soaking the rich.” But the Times is right :“Raising taxes at the top is neither punitive nor gratuitous.” In this bold editorial, the Times says what needs to be said. Raising taxes at the top, “is a needed step, both to achieve near-term budget goals and to lay the foundation for a healthy budget in the future.”
For this reason, I predict that sometime in the next year or two, President Obama will go back to Congress and insist on letting all of the Bush tax cuts for the top 2% expire. The public is already behind him.
But: What about the Deficit?
Many readers might ask: “Even if we lift taxes, can we really afford to spend more on infrastructure repair, education, the poor, and the environment? Shouldn’t we use those revenues to pay down the deficit?
What too few Americans realize is how much progress we already has made in shrinking the deficit.
During the final fiscal year of President George W. Bush’s administration the deficit stood at $1.4 trillion. In President Obama’s fourth fiscal year it will come in at around $800 billion. (Hat tip to The National Memo and Steve Benen on Maddow Blog.) It is worth noting that the deficit has never before fallen this quickly without triggering a recession.
Nevertheless conservatives have been remarkably successful in persuading the public that President Obama is a reckless spender who cares little about debt. The most recent Bloomberg poll reveals that only 6% of Americans are aware that, on Obama’s watch, the deficit has been sliced nearly in half
Progressive bloggers and journalists must let voters know the truth: we can afford to stimulate our economy, create jobs, invest in our children, help the poor, keep our promises to seniors, expand Medicaid and address global warming. In fact, we can’t afford not to.