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The "Half a World War II" Debt Solution

April 25, 2011

The United States was slowly recovering from economic catastrophe. Its military forces were deployed worldwide in a global conflict to defeat what even the President's political opponents deemed an existential threat. U.S. national debt would soon top 100% of the nation's entire economic output. And the top marginal income tax rate was 94%.
The year was not 2011, but 1945. Nevertheless, fighting two unfunded wars and grappling with the rising debt necessary to resuscitate a weakened economy, Americans now face a similarly challenging fiscal environment, albeit on a smaller scale. All of which suggests a simple rule of thumb: Americans can and should pay half the upper income tax rates as the Greatest Generation did as a first step to getting the U.S. national debt under control.
Call it the "Half-a-World War II Solution."

Of course, the situations are not exactly analogous. Alone emerging unscathed in 1945, the U.S. economy dominated global trade and represented half of the world's entire output. That's a far cry from America's relatively diminished competitive position now. Today's expanded social safety net (i.e. Medicare, Medicaid), changed tax loopholes and $1 trillion in tax expenditures make for a much different wartime America.
But from a public policy standpoint, post-9/11 America in no way resembles FDR's response to Pearl Harbor. George W. Bush was the first modern president (Barack Obama was the second) to cut taxes during wartime. By the time the U.S. drawdowns in Iraq and Afghanistan are complete, the total unpaid tab for war-fighting, reconstruction, increased baseline defense spending and health care for American veterans will approach $3 trillion.
The self-inflicted fiscal hemorrhaging hardly ends there. An analysis by the Center on Budget and Policy Priorities found that Bush tax cuts accounted for almost half of the mushrooming deficits during his tenure; increased defense, DHS and international aid spending represented only 35% of the additional red ink. And as another CBPP analysis revealed that over the next 10 years, the Bush tax cuts if made permanent will contribute more to the U.S. budget deficit than the Obama stimulus, the TARP program, the wars in Afghanistan and Iraq, and revenue lost to the recession - combined.
For their part, Republicans want to make a bad situation much worse. Not content to block a return the top 39.6% tax rate of the booming Clinton years, the GOP only wants to make the Bush tax cuts permanent. The Ryan budget passed by the House this month would slash the top individual tax rate from 35% to 25% in a move that would cost the Treasury $4 trillion (including yet another $1 trillion for the wealthy) over 10 years.
More important is a point which can't be stressed enough: the American tax burden hasn't been this low in generations.
Thanks to the combination of the Bush Recession and the Obama tax cuts, the AP reported, "as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way." In January, the Congressional Budget Office (CBO) explained that "revenues would be just under 15 percent of GDP; levels that low have not been seen since 1950." That finding echoed an earlier analysis from the Bureau of Economic Analysis. Last April, the Center on Budget and Policy Priorities concluded, "Middle-income Americans are now paying federal taxes at or near historically low levels, according to the latest available data." As USA Today reported last May, the BEA data debunked yet another right-wing myth:

Federal, state and local taxes -- including income, property, sales and other taxes -- consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8% of income before rising slightly in the first three months of 2010.
"The idea that taxes are high right now is pretty much nuts," says Michael Ettlinger, head of economic policy at the liberal Center for American Progress.

Which is why it's time for Americans - the rich above all - to pay their fair share. And during this time of war, paying half what the Greatest Generation ponied up seems like a good starting point.

As it turns out, that's precisely what a number of Democrats in the House and Senate have called for. Earlier this month, Senator Al Franken (D-MN) proposed the "Pay for War" resolution, which would require Congress to offset any costs for military operations that go beyond the Defense Department's base budget with either new tax revenue or corresponding spending cuts. In March, Franken's colleague from Vermont Bernie Sanders called for a 5.4% tax surcharge on Americans earning over $1,000,000 a year. Then just days later, Congresswoman Jan Schakowsky (D-IL) introduced the "Fairness in Taxation Act." Her plan, which would add an estimated $78 billion in annual tax revenue starting this year, would boost the current top 35% rate for millionaires and billionaires. As her web site explained:

The current top tax bracket begins at $373,000 in income and fails to distinguish between the "well off" and billionaires - like the top 20 hedge fund managers whose average income last year was over $1 billion.
The Fairness in Taxation Act asks enacts new tax brackets for income starting at $1 million and ends with a $1 billion bracket. The new brackets would be:
$1-10 million: 45%
$10-20 million: 46%
$20-100 million: 47%
$100 million to $1 billion: 48%
$1 billion and over: 49%
The bill would also tax capital gains and dividend income as ordinary income for those taxpayers with income over $1 million.

Schakowsky's suggested individual tax rates aren't just in the ballpark of the "Half-a-World War II" solution. They also happen to be the centerpiece of the People's Budget proposed by the Congressional Progressive Caucus. As it turns out, the Grijalva/Elliison document is the only proposal from either party which would erase annual budget deficits by 2021. And as voices as diverse as Paul Krugman and The Economist point out,

Mr. Ryan's plan adds (by its own claims) $6 trillion to the national debt over the next decade, but promises to balance the budget by sometime in the 2030s by cutting programmes for the poor and the elderly. The Progressive Caucus's plan would (by its own claims) balance the budget by 2021 by cutting defence spending and raising taxes, mainly on rich people. Mr. Ryan has been fulsomely praised for his courage. The Progressive Caucus has not.

Of course, upper-income tax hikes alone are not sufficient to get the $14 plus trillion national debt under control. Since 2001, American defense spending in dollar terms has doubled; as percentage of GDP, it jumped from 3% to 5%. And while Social Security is not a driver of deficits (and can be improved further by raising the income cap on payroll contributions to, say, $250,000), health care is. As Ezra Klein put it, "The problem is not MedicareandMedicaid. It's health care." And as Paul Krugman explained, the cure for that problem isn't without pain.
But if the rich should pay most of all, everyone needs to pay more. That $3 trillion bill for Iraq and Afghanistan remains unpaid. In World War II, the Greatest Generation not only fought the war but paid for it, too. Whether it takes the form of the repeal of all or most of the Bush tax cuts, or a temporary, ten year national sales tax, all Americans need to contribute. After all, as Franklin Roosevelt put it as Pearl Harbor was still smoldering on December 9, 1941:

"It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the trainman or the doctor, to pay more taxes, to buy more bonds, to forego extra profits, to work longer or harder at the task for which he is best fitted. Rather is it a privilege."

Surely, we can do more than we're doing now. Starting with half of what we did then.
(For my own proposal to pay off down the costs of the Iraq and Afghanistan wars, see "The Bipartisan Tax Cut Act of 2013.")


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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