Obama Should Raise Taxes on the Rich. Here's Why.

President Obama's budget calls for the 2001 and 2003 Bush tax cuts to expire for Americans making more than $250,000. This will not be popular -- not among the rich, not among Republicans, and especially not among rich Republicans. But I am none of those things, so here I go defending it!

In the spirit of positive, constructive debate, I wanted to take on this post from one of The Atlantic's correspondents, former Rep. Mickey Edwards. President Obama promised to let the Bush tax cuts expire throughout his campaign, and Edwards said he voted for Obama, so I'm not sure why he's upset surprised. Here's his paragraph, with my thoughts numbered and footnoted:
Noticing that the country (actually, it's the government, not the country) [1] is in a deep, deep financial hole, the President has proposed to shrink the outgo-income shortfall by raising taxes. [2] The first part of that job, therefore, is to determine whose taxes to raise--everybody's (hardly palatable in an election year) or just those of a particular sub-group. The decision was easy, especially given the worldview, common among so many Democrats, that high earners are ipso facto the bad guys of society [3], even if that income has been earned by hard work at two or more simultaneously-held jobs and is offset by the non-frivolous but non-deductible needs of loved ones (these incidentals are not taken into account). So how to determine who are the baddest of the bad guys. The apparent conclusion: anybody who earns at least $250,000 a year.
[1] This parenthetical might seem incidental to the broader argument, but it's important to clarify that the country is quite surely in a deep, deep hole. One of out of ten Americans in unemployed, and one of of six is out of work, forced to work part-time, or given up looking for jobs. We're also massively in debt. Between January 2000 and November 2009, non-revolving debt increased 72%, and it shows no signs of abating. Let's throw in stagnating wages, a pinch of rising health care premiums which eat into income, and the expectation that we're looking at another jobless recovery, which will suppress consumer demand -- and, in a vicious spiral kind of way, hiring, and income and government tax receipts -- for years to come. That looks like a financial hole to me.

[2] But Obama's budget actually grows the outgo-income shortfall by proposing a record nominal deficit. And that's not a bad thing, either. First let's look at why the deficit is growing. It takes a group effort to build a $1.6 trillion debt, and this year the group effort includes: existing deficits from the Bush years, depressed tax receipts from the recession, increased automatic spending from the recession, bailouts, and stimulus.

So why is Obama growing the deficit? Precisely because of the circumstances described in Part 1 above. One-sixth of the country broadly qualifies as unemployed, and with the economy producing under capacity Obama increased government outlays to replace private demand that has disappeared. The $787 billion stimulus, of which we'll spend another couple hundred billion this year, was necessary to grow GDP -- and did grow GDP by as much as 3 percent, according to many economic analysts -- even if it was imperfectly designed.

Still, Obama has expressed concern for the deficit that the recession, and its response, has necessitated. He can't cut spending dramatically in the turnaround without risking a double-dip recession. So he's raising some taxes. Moving on to number 3....

[3] Now we get to the main argument: Raising taxes on rich people is an act of spite.

Well, look. Reasonable people can disagree about the appropriate marginal tax rate for the top income bracket. But it is not a helpful contribution to the subject to say we have a progressive tax system because Democrats think "high earners are ipso facto the bad guys of society."

Let's consider the plan to tax Americans who make more then $250K. They account for about 2% of all earners. In 2006, the top one percent of earners made the highest share of income in American history (22%) and their effective individual income tax rate was 19%. That ETR is the lowest it's been since the mid-1980s, when the top percent's share of income was only 12%. Surely if Congress is looking to raise money, it makes sense to aim for where the money is. In the top two percent, there is quite a lot of money being taxed at historically low rates.

I don't think it's responsible politics to fund a country exclusively on the top one percent of taxpayers (and the top percentile does pays the all-time highest percent of taxes). That's why my deficit-busting plan, if anybody's curious, would also trigger a VAT when unemployment dipped below a certain percent. But it really, truly is not a matter of anti-wealth conspiracy to call for a large deficit to fight the recession, and a tax increase on the wealthiest Americans to help bring down the deficit.