Taxing the Rich for the Benefit of All (Even the Rich)
Warren Buffett performed a very civic duty when he wrote his op-ed in the New York Times pleading for the U.S. government to raise his taxes. He makes two basic points: (1) the rich can surely afford to pay higher taxes, and (2) their paying higher taxes would not prevent them from investing and hiring.
Bill Gale, speaking as a smart economist rather than famous rich person, goes further, explaining the historical evidence that low taxes grow the deficit more than the economy, aren’t effective at constraining the growth in government spending, and have contributed to the dramatic rise in income inequality. But instead of just endorsing Buffett’s idea that we could just raise marginal tax rates on the rich (what sounds like a version of the “millionaire surtax”), Bill suggests (in his op-ed on CNN.com) there are better ways to raise taxes, even if only on the rich, by broadening the tax base and rethinking our ill fated love affair with the Bush tax cuts:
There are, of course, better and worse ways to raise taxes. A general goal would be to broaden the tax base — reduce the use of specialized credits, deductions, loopholes and so on — and minimize the extent to which tax rates need to rise.
One good place to start? High-income households: Limit the rate at which itemized deductions can occur to 28%. This would affect only households in the highest income ranges, it would not raise their official marginal tax rate, and it would raise $293 billion over the next decade, relative to how much money would be raised according to current law, according to the Congressional Budget Office. This would be a small move in the right direction.
Of course, sticking to current law revenues — that is, either not extending the Bush tax cuts after their scheduled expiration date of 2012 or paying for any extension with a reduction in various tax expenditures — is even more important. Extending the Bush tax cuts would reduce revenues by about $2.5 trillion over the next decade, relative to current law. Counting net interest savings, it would cost $3 trillion. Letting the cuts expire could actually help economic growth since the lower deficits would more than offset the effect of slightly lower marginal tax rates, and it would be progressive. That would be a big move in the right direction.
So although Buffett tells us that we could start with our already-flawed income tax policy and just raise tax rates on millionaires and billionaires and score a net win for society as a whole (because deficits would come down and jobs would still be created–i.e., economic life would still go on), Bill Gale tells us that there are even better ways to “tax the rich” to produce an even bigger net benefit for all.
If the federal government could spend less of its money on tax cuts for the rich, it would have more available for some combination of: (1) deficit reduction (better for longer-term growth and current interest rates), and (2) fiscal policies more effective at encouraging near-term demand (better for jobs). (It doesn’t have to be either-or.)
Maybe we can think of any new willingness to raise taxes on the rich as “growing up” economics rather than “trickle down.”
Are policymakers ready to grow up?