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Home Publications Blogs Beat the Press Taxing Problem May Not be That Taxing

Taxing Problem May Not be That Taxing

Thursday, 13 December 2012 05:25

The NYT ran an article noting that President Obama and many progressives seem prepared to let the Bush tax cuts remain in place for the vast majority of the population. The rationale is that most of the income gains of the last three decades have gone to those at the top of the income distribution. The piece points out that this decision could leave the government seriously short of revenue, concluding with a quote from former Obama administration economist, Jared Bernstein [a friend and co-author]:

"But ultimately we can’t raise the revenue we need only on the top 2 percent."

Actually the seeming conundrum is not quite as bad as is portrayed here. The revenue projections from the Congressional Budget Office (CBO) and others assume that the upward redistribution of income does not continue. For example, CBO projected that the profit share of GDP would fall by almost 25 percent from 2011 to 2022 (Table 2-1). If it turns out that CBO is wrong (as it has been thus far) and the profit share of GDP continues to rise, then we will raise considerably more tax revenue from the current structure of taxes than CBO projects.

Alternatively, if CBO's income projections prove correct, then the middle class will be seeing rapid growth in their real income. This means that they will be able to afford modest increases in their tax rates.

So the story here is not quite as dire as the article implies. As a simple rule, we can in fact raise all the revenue we need from the top 2 percent, if the top 2 percent have all the money.


Comments (8)Add Comment
Win Win - Not Damned If You Do, Not Damned If You Don't
written by Last Mover, December 13, 2012 5:24
Nice takedown of the usual dumbed down zero sum arguments about how taxes on the rich can't possibly finance much of anything.

Rather than the usual "damned if you do tax the rich or damned if you don't" it's win if the rich keep their economic rent by sharing more of the growing absolute gains, or win if the rich lose them to the middle class in the form of increased growth in income.
doesn't have a precedent in Europe though
written by Brian Dell, December 13, 2012 5:43
There is a lot of social spending in Scandinavia but someone at the median income level also pays a lot of tax. Generally an extensive welfare state needs a VAT to remain funded. The system is already quite progressive by international standards in states like California.
The problem is that
written by Mcwop, December 13, 2012 7:51
our government is NOT revenue constrained. Right now the government needs to be running higher deficits, and if anything should cut taxes on the 98% increasing their take home pay. Raising taxes on the rich redistributes ZERO if you do not change how the budget money is spent.

Increasing taxes on the rich simply debits their checking account and the federal government simply issues less debt thus creating a lower deficit number. It drains net financial assets from the economy. It in no way changes how the budget is spent and what class of people it is spent on - it simply does not.

In fact, if you increase taxes on the rich by '100', the only way that gets redistributed is if you also increase the federal budget by '100' AND that money is targeted to say the 98%.
written by David, December 13, 2012 8:12
Current taxes are based on low GINIs of the past. As their GINIs drift upward, so will the rates on the wealthy.

written by skeptonomist, December 13, 2012 8:40
The analysis does not go far enough into contingencies. If inequality continues to grow and the middle class continues to be impoverished no one will be able to buy products and services, profits will drop off and so will the income of the rich. The poverty rate will increase and so will the need for social services, increasing government expenditures.

Actually nobody knows enough to be able to project these things very far in the future. But there are some things we do know, for example: currently some people have a great deal of money and are not using it in economically constructive ways, while others do not have enough to live decently without government aid; drastically reducing tax rates on the rich since 1965 has not led to greater overall prosperity - if anything it has had the reverse effect; and the higher the net income of a group the greater their political power and the more they are able to obtain political policies favorable to themselves. There are powerful reasons for restoring progressive tax rates without trying to project government revenue/expenditure balance into the future.
Why is it always assumed
written by Mcwop, December 13, 2012 9:01

Why is it always assumed that inequality grows because marginal tax rates are lower? Inequality went up under Clinton despite an increase in marginal rates, and other taxes like removal of the medicare cap.
inequality is clearly linked to technological boom
written by pete, December 13, 2012 10:13
As with the industrial revolution, when inequality soared till the 1920s, this time inequality has soared while incomes have risen across the board. One would expect that as things have slowed since the bubble burst in 2000, that the incomes will flatten. Stock returns (the market risk premium) are projected to be much smaller than in the past by most finance folks, see the Graham and Harvey work on this. Calm down. And I recall seeing other work has shown that the top incomes are not the same individuals each year. This makes sense if dotcommers are cashing in shares, generating income, but a different group every year.
written by skeptonomist, December 13, 2012 10:13
Mcwop: I don't assume that inequality is due only to tax rates directly - Dean has a long list of policies that have promoted inequality - see his books. As I said the more money the rich can take home, the more there is for political influence to get those policies passed.

A lot of the growth of inequality in the 90's was a result of the stock-market bubble, since it is mostly upper-income people who own stocks. And the surpluses of 1999 and 2001 were mostly a result of capital gains taxes on those stock gains. The capital-gains rate was dropped in 1997, which probably caused a lot of people to cash in. Of course the usual suspects predicted dire consequences if the Clinton tax increases were passed, a prediction which was contrary to the historical evidence and which was completely falsified by the boom.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.