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The Real Standard for Seriousness on the Debt

April 13, 2011

Last week, the political chattering classes praised Republican Paul Ryan's "serious" budget proposal to slash $4.3 trillion in spending in order to fund yet another round of upper-income tax cuts. But over just the past few days, the New York Times' David Leonhardt, Slate's Annie Lowery and Ezra Klein of the Washington Post offered a much more effective if tongue-in-cheek approach to dramatically reducing U.S. deficits.
Do nothing. Seriously.
Serious, that is, because simply by letting the Bush tax cuts expire at the end of 2012 as currently scheduled will slash the debt by at least $4 trillion over the ensuing decade. As the math below shows, any deficit hawk refusing to consider tax increases simply isn't serious about reducing the U.S. national debt.
Which, in theory, should be a major problem for Republicans. Yesterday, John Boehner dismissed tax hikes out of hand as a "non-starter." Congressman Ryan, who voted against the Simpson-Bowles Commission plan and its familiar sounding deficit-cutting target of $4 trillion over 10 years, argued "We don't have a problem because Americans don't pay enough taxes." (You may recall that GOP Senators McConnell, McCain and others voted against creating the commission they once sponsored because "they feared the panel might suggest raising taxes") And Senator Saxby Chambliss (R-GA), a member of the so-called Gang of Six working on their own bipartisan debt reduction plan, recently announced, "None of us have ever voted for a tax increase, and I don't intend to."
At the heart of Republican opposition is the myth that "tax cuts pay for themselves." In George W. Bush's formulation, "You cut taxes and the tax revenues increase." Arizona's Jon Kyl, now famous for declarations "not intended to be a factual statement," magically claimed last year that "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans." Last summer, then House Minority Leader John Boehner offered his own version of the Republican uber-lie:

"It's not the marginal tax rates ... that's not what led to the budget deficit. The revenue problem we have today is a result of what happened in the economic collapse some 18 months ago."
"We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes."

As it turns out, not so much.
Following his massive supply-side tax cuts of 1981, Ronald Reagan was forced to face the reality of the endless red ink they produce by subsequently raising taxes six times. Nevertheless, U.S. national debt tripled under Reagan.
After the Bush tax cuts of 2001 and 2003, the debt doubled again. When Barack Obama took office in the midst of the worst economic crisis since the Great Depression, the annual deficit had already reached $1.2 trillion. Thanks to the GOP which raised the debt ceiling seven times during his presidency, Bush bequeathed a $12 trillion debt to his successor.
And to be sure, the Bush tax cut for windfall for the wealthy played a major role in emptying the U.S. Treasury. The Center on Budget and Policy Priorities found that the Bush tax cuts accounted for almost half of the mushrooming deficits during his tenure:

And as another CBPP analysis revealed, over the next 10 years, the Bush tax cuts if made permanent would contribute more to the U.S. budget deficit than the Obama stimulus, the TARP program, revenue lost to the recession and the wars in Afghanistan and Iraq put together.

And speaking of the wars, the price tag for Iraq and Afghanistan will approach $3 trillion. Once all the costs of the actual fighting, veterans care, expanded baseline defense spending and extra interest on the national debt are factored in, that's the estimated cost for the still-unfunded American conflicts in Afghanistan and Iraq. Yet, George W. Bush was the first president in modern American history to cut taxes during war-time. (With the 2009 stimulus bill and last December's $800 billion tax cut compromise, President Obama became the second.)
While the tax code's loopholes and exemptions have changed over time, there's little question that Americans paid much higher taxes during past conflicts. This proud American tradition was met by the well-to-do of the Greatest Generation, who paid a top income tax rate of 94%.

Largely overlooked in the current debate over debt and deficits is the fact the American tax burden hasn't been this low in generations. Thanks to the combination of the Bush Recession and the latest 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.

That idea is especially nuts when it comes to the wealthiest among us.
If the gap between the rich and everyone feels larger than ever, that's because it is. As the data show, income inequality has hit levels not seen in the United States since 1929.
A report from the Center on Budget and Policy Priorities (CBPP) found a financial Grand Canyon separating the very rich from everyone else. Over the three decades ending in 2007, the top 1 percent's share of the nation's total after-tax household income more than doubled, from 7.5 percent to 17.1 percent. During that time, the share of the middle 60% of Americans dropped from 51.1 percent to 43.5 percent; the bottom four-fifths declined from 58 percent to 48 percent. As for the poor, they fell further and further behind, with the lowest quintile's income share sliding to just 4.9%. Expressed in dollar terms, the income gap is staggering:

Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation -- an increase in income of $973,100 per household -- compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.

As the New York Times revealed in August 2009, by 2007 the top 1% - the 1.5 million families earning more than $400,000 - reaped 24% of the nation's income. The bottom 90% - the 136 million families below $110,000 - accounted for just 50%.

In February 2004, President Bush proclaimed, "we cut taxes, which basically meant people had more money in their pocket." Of course, some people are more equal than others.
Reviewing the Census data, David Cay Johnston concluded that the Bush tax cuts which have already drained the Treasury of $2.3 trillion were a major contributor to the record U.S. income gap:

In only two of the eight Bush years, 2006 and 2007, were average incomes higher than in 2000, but the gains were highly concentrated at the top. Of the total increase in income in 2007 over that in 2005, nearly 30 percent went to taxpayers who made $1 million or more...
One of every eight dollars of the tax cuts went to the 1 in 1,000 taxpayers in the top tenth of 1 percent, the annual threshold for which was in the $2 million range throughout the last administration.

On the heels of the December agreement which delivered another $140 billion, two-year pay day to the gilded class, Republicans have once again called for making the Bush tax cuts permanent. In his GOP budget proposal, Paul Ryan went even further in calling for reducing the top tax rate to 25% while supposedly closing loopholes predictably left unspecified. But as Johnston documented, the top 2% of taxpayers have already reaped a bonanza:

The number of people reporting incomes of $200,000 or more but legally paying no federal income taxes skyrocketed in the second Bush term. A decade ago it was fewer than 1,500 taxpayers; in 2000 it was about 2,300. This high-income, tax-free group jumped to more than 11,000 in 2007 and then doubled in 2008 to more than 22,000.
In 2008 nearly 1 in every 200 high-income taxpayers paid no federal income tax, up from about 1 in 1,500 in 1998.
The share of high incomes that were untaxed increased more than sevenfold to one dollar of every $166.

But that's just the beginning of the story. As the CAP also reported, the Bush tax cuts delivered a third of their total benefits to the wealthiest 1% of Americans. And to be sure, their payday was staggering. The Center on Budget and Policy Priorities detailed that by 2007, millionaires on average pocketed $120,000 from the Bush tax cuts of 2001 and 2003. Those in the top 1% stashed an extra $45,000 a year. As a result, millionaires saw their after-tax incomes rise by 7.6%, while the gains for the middle quintile and bottom 20% of Americans were a paltry 2.3% and 0.4%, respectively.
And as the New York Times uncovered in 2006, the 2003 Bush dividend and capital gains tax cuts offered almost nothing to taxpayers earning below $100,000 a year. Instead, those windfalls reduced taxes "on incomes of more than $10 million by an average of about $500,000." As the Times explained in a shocking chart: "The top 2 percent of taxpayers, those making more than $200,000, received more than 70% of the increased tax savings from those cuts in investment income."

It's no wonder that between 2001 and 2007, the 400 richest taxpayers saw their incomes double to an average of $345 million even as their effective tax rate was virtually halved.
Still, the GOP wants that upward redistribution of wealth to continue by making the Bush tax cuts permanent. If Republicans Senators had their way and limited spending to 18% of the American economy, neither Ronald Reagan then nor Paul Ryan now could meet the target. Taxes simply must go up, especially for the wealthiest Americans.
After all, the last time the top tax rate was 39.6% (as President Obama now proposes) during the Clinton administration, the United States enjoyed rising incomes, 23 million jobs and budget surpluses.
Ultimately, increasing tax revenue is just one part of getting 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 at the end of the day, when it comes to cutting deficits and reducing the U.S. national debt, you can't there from here without raising taxes. When the effects of this recession (and perhaps, the 2012 presidential election) are over, that's precisely what we should do.


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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