Taxing Problem May Not be That Taxing

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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.