We Have to Raise Taxes to Stabilize the Debt

The Committee for a Responsible Federal Budget designed a budget simulator that challenges users to limit the US public debt burden to 60% of GDP by 2018. I took the challenge yesterday, and faced some blowback over my tax-heavy plan to remake the budget.

The criticisms of my plan in the comment section were provocative and smart. So rather than bury my responses in an old article, I wanted to address them in a fresh post. Here we go:

1) Marketkarma: "You are really nailing wage based coastal high-earners."
That's basically right. I'm eliminating a lot of deductions that benefit blue state rich folks: the mortgage interest deduction, which is valuable for people with high mortgage interest payments as a percent of their total tax burden; and the state and local tax deduction, which hits states with a disproportionate share of high-income households and relatively high state/local taxes (see this Tax Policy Center article by Kim Rueben). I also elected to add another tax bracket for millionaires and let the Bush tax cuts expire for families over $250K.

MK estimates that my reforms might take these folks effective local/state/federal tax burden to more than 60%. I don't know if that's accurate. I certainly give some coastal high-earners a proper bludgeoning, but the richest families are already losing the value of some of these deductions because of the Alternative Minimum Tax, which uses a different set of taxable income and deduction rules to determine wealthier families' tax burden.

Federal tax burdens on the rich have fallen dramatically in the last 30 years. In 1988, President Reagan's last year in office, the top 10 percent, 5 percent and 1 percent of income-earners paid total effective tax rates of 27%, 28% and 30%, respectively. Under 2009 law, these groups will pay the feds closer to 22%, 23% and 26% of their income -- across the board, an approximate difference of five percentage points. We can afford to raise these rates to pay down the debt over the next 20 years.

2) Kill the Bush tax cut?
Two commenters -- Steveinch and RustyJohn -- suggested that we let the entire Bush tax expire at the end of 2010. Arithmetically, this is an attractive option. Compared to President Obama's plan to renew the tax cut for families making less than $250K, letting the whole thing go would shave an additional $2.1 trillion off the debt. Repealing health care reform, by comparison, saves about 12% of that: $260 billion. But letting the whole Bush tax cut go -- including the tax credits and marginal rates for lower-income folks -- would kick the economy in the stomach just as it's starting to breathe normally again.

Ultimately, the most important takeaway from the budget simulator is that a 100% spending-side solution to our debt is pretty much impossible. You can freeze discretionary spending, slash subsidies and enact major entitlement reform by means-testing benefits and raising the full retirement age. But very few itmes come close to the impact from letting the Bush tax cuts expire and taking the axe to tax expenditures like the deductions on state and local taxes and mortgage interest. This isn't the opinion of your tax-loving author. It's just math.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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