Make the Rich Pay Their Fair Share!

Today, the Republicans unveiled their "Pledge to America".

House Republicans offered their “Pledge to America,” a combination campaign platform and legislative agenda, on Thursday morning, saying that jobs will return if spending slows and tax rates are kept from rising.

The Republican leaders called on the Speaker of the House, Nancy Pelosi, Democrat of California, to immediately begin a debate on the items on their list, including making lower tax rates for all taxpayers permanent, holding back federal spending, repealing the health-care overhaul enacted this year and reducing the federal deficit.

Most of the Democrats are in favor of keeping the Bush tax cuts set to expire at the end of the year for all except the 2% who make over $250,000 per year. But the Republicans desperately want to keep those tax cuts for the very wealthiest Americans.

So this leaves us with two questions: Is it morally right to increase the tax rate on the richest from about 35% as it is now to about 39% as it was during the Clinton administration? and…Will keeping the tax cuts for the upper 2% permanent truly reduce the federal deficit?

The moral question is a bit trickier than it seems at first. Just saying that because these people are rich we have a right to take more of their money is not a satisfactory argument by itself. After all, it is their money. But while many of us over the last decade have struggled financially, the very richest have gotten even richer because of preferential tax treatment.

The top 400, all of whom are worth at least $1 billion, saw their combined wealth increase 8 percent this year, to the dizzying total of $1.37 trillion, according to analysis from CNN.

This means the 400 richest people in America account for about 2.6 percent of the nation's private wealth.

The idea of giving tax cuts to the very rich was that if they prospered, the rest of us would also prosper. But that has proven to be a false as income inequality is at an all-time high.

Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers "truly amazing."

...while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993-2000, these incomes grew only 1.3 percent per year from 2002-2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.

But income inequality in itself is not as much of an issue as long as everybody is doing reasonably well. But when the middle and lower classes are getting hammered while at the same time the rich are getting richer, it is no wonder that there is talk of class warfare. Even conservative economist Ben Stein was moved to write a 2006 op-ed, In Class Warfare, Guess Which Side is Winning?

It turned out that [multibillionaire Warren] Buffett, with immense income from dividends and capital gains, paid far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office. Further, in conversation it came up that Mr. Buffett doesn’t use any tax planning at all. He just pays as the Internal Revenue Code requires. “How can this be fair?” he asked of how little he pays relative to his employees. “How can this be right?”

Even though I agreed with him, I warned that whenever someone tried to raise the issue, he or she was accused of fomenting class warfare.

“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Morals aside, another part of the article brings us to the second question about how we can reduce the deficit which just about all conservatives claim to be important to them.

Put simply, the rich pay a lot of taxes as a total percentage of taxes collected, but they don’t pay a lot of taxes as a percentage of what they can afford to pay, or as a percentage of what the government needs to close the deficit gap.

Our recent experience has shown that there are only two realistic ways to try and close a deficit gap — cutting spending and/or raising taxes. Even conservative economic gurus such as former Fed chief Alan Greenspan (along now with Florida GOP Senate candidate Marco Rubio) have now admitted that tax cuts don't pay for themselves.

The solution given by those on the political right is never to raise taxes but instead to cut spending to balance the budget. But as Ben Stein observes:

The imperatives for [increased] spending are built into the system, and now, with entitlements expanding rapidly, increased spending is locked in. Medicare, Social Security, interest on the debt — all are growing like mad, and how they ill ever be stopped or slowed is beyond imagining. Gross interest on Treasury debt is approaching $350 billion a year. And none of this counts major deferred maintenance for the military.

It is telling that although the Republicans’ Pledge to America aims to hold back federal spending and reduce the federal deficit, it offers no specifics on how they would actually cut the budget. And let’s face it, if the Republicans are not in favor of cutting defense spending and the Democrats are not in favor of cutting entitlement spending e.g. Medicare and Social Security, what else is there to cut?

So despite those on the right who say that we are all taxed enough, the only way out of this mess is to bring in more tax revenue to pay for what we want and need our government to do. But especially with the lower and middle classes hurting so badly, we can’t ask more of them. But we can certainly ask the wealthy who have prospered so well in recent years from preferential government tax treatment to carry more of the load.

The concept behind what is called progressive taxation is that the wealthy who can most afford it, are required to pay higher tax rates than others who are less able to afford taxation. In addition, raising marginal tax rates on the wealthy has been an important safety valve for when our government has had to make unexpected large expenditures, such as for wars and during the Great Depression (see chart). At times our top marginal rate for the wealthy has been over 90% during wars. What is unprecedented is George W. Bush conducting the Iraq and Afghanistan wars while at the same time, offering a tax cut to the wealthy. No wonder we turned the budget surplus under Bill Clinton into a huge deficit in such short order!

Even most liberals do not favor us returning to the days of 90% tax rates for the wealthy. That is unfair to them! But when The Angry Rich are fighting so bitterly to keep their tax rates from reverting from 35% now to 39.6% when Bill Clinton balanced the budget, that is unfair to the rest of us! When those (especially the wealthy) who make their money from dividends and capital gains get to pay a much lower rate than those of us who work for a living, that is unfair! When hedge fund managers whose annual incomes are sometimes over a billion dollars can through a tax loophole pay at only a 15% rate, that is unfair! When instead of raising the Social Security taxable income above $106,800, we get the absurd idea of raising the retirement age to 70, that is unfair!

So if we are really about fairness, there is one thing that we can do. We must make the rich pay their fair share!