We Need Higher Taxes, and Not Just for the Rich

President Obama is going to have to break his campaign promise and raise taxes on Americans making under $250,000. There's really no way around it.

The president's deficit plan would raise taxes by $2 trillion in the next decade. The first trillion would come from letting the Bush tax cuts expire for families making more than $250,000 a year, or 3.2% of the country. The second trillion would come from reducing "spending in the tax code," like the mortgage interest deduction. The president wasn't very specific about where these tax increases would come from but he did not suggest that the middle class would have to share in the sacrifice. Here's what he said:

The tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, like homeownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn't itemize.

My budget calls for limiting itemized deductions for the wealthiest 2% of Americans - a reform that would reduce the deficit by $320 billion over ten years. But to reduce the deficit, I believe we should go further. That's why I'm calling on Congress to reform our individual tax code so that it is fair and simple - so that the amount of taxes you pay isn't determined by what kind of accountant you can afford. I believe reform should protect the middle class, promote economic growth, and build on the Fiscal Commission's model of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. And as I called for in the State of the Union, we should reform our corporate tax code as well, to make our businesses and our economy more competitive.

If the White House keeps its campaign promise, tax rates on the rich will go from a historical low to a historical high in a few years. The top 3 percent of tax payers, who contribute about $700 billion a year in tax payments, would be tapped for an additional $2.3 trillion in tax increases over the next decade, in the form of higher income rates, lower tax deductions, and new Medicare taxes.

Would this kind of tax increase destroy America? Maybe not, said Roberton Williams of the Tax Policy Center. "My gut sense is that there's enough money up there that we can raise rates through the range without killing these people. But it's not ideal either."

The Center on Budget and Policy Priorities, a center-left think tank, concluded that the only way to raise enough revenue to close the debt gap was to allow the entire Bush tax cut to expire in 2012 ... even though it would mean higher taxes for every filer and $1,000 less in after-tax income for the typical taxpayer.

"If you want to reform tax expenditures intelligently, you shouldn't be running it through the top two percent," Robert Greenstein, the president of CBPP, told me. "I think we should let all the Bush tax cuts expire at the end of 2012. The big enchilada is health care but we can't change it dramatically in the next ten years. Tax increases buy you time."


When liberals make the case for higher taxes for the rich, they often begin with a chart like this:

This graph is 100% accurate. Average, or "effective," tax rates have fallen dramatically for the top 1% since the 1970s. But this is only a sliver of a bigger picture: Average tax rates have fallen dramatically for everybody since the 1970s, from the poorest quintile (which has seen its tax rate chopped in half) to the highest percentile. Here's the 30 year story:

History Effective Tax RATES.png

Of course, the rich are different from the rest of us: They have a lot more money and they see most of the gains of income growth. Any sensible tax reform should begin with raising the effective rates at the top before we gradually lift rates for the middle class. But the fact is the United States has, for the last 30 years, promised better benefits with lower tax rates, and the inevitable collapse of that promise is growing nearer.

We all paid a little bit more in 1999. We could afford it then, and we can afford it again. Let's have real tax reform that gives meaning to the term "shared responsibility." It's time for the president to break his promise.