Bush-era rate cuts launch a taxing debate

Tribune columnist Eric Zorn and I square off again--this time on the Bush tax cuts.'


From Eric, to Dennis:

In May, 2001, four months into President George W. Bush's first term, Congress passed across-the-board tax cuts despite the fears of most Democrats and a few Republicans, including Arizona's Sen. John McCain, who voted "no" because, he said, the bill helped the wealthy "at the expense of middle-class Americans."

And, indeed, in subsequent years the rich got richer -- the average income of the top 1 percent of earners went up a third -- while the poor got poorer -- the bottom 20 percent dropped slightly -- and those in the middle stayed about the same. The budget surplus of the '90s turned into a massive and still growing deficit.

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Eric Zorn

Those tax cuts will expire on New Year's Day, so Congress has to act.

 There's broad agreement in Washington that the cuts should be extended for 98 percent of wage earners, but there's a vehement debate brewing about whether to let the rate paid by the top 2 percent -- families  who earn $250,000 or more; individuals who make $200,000 or more -- revert to the slightly higher rate levied during the Clinton administration.

I say yes. You?

From Dennis, to Eric:

Punish the rich.

That's what we're really debating here. I really don't understand why some Americans are so resentful of financial success, as long as it is achieved honestly and legally.

And so, it's axiomatic that whenever we talk about tax policy -- something few people, including us, I dare say, fully comprehend -- it's almost always formulaic: Soak the rich. Or, in the popular parlance, redistribute income. Which is what President Barack Obama's tax proposal seeks to do.

It's not enough that the progressive income tax already imposes a higher tax rate on wealthier Americans. Or that a small group of Americans pick up by far the largest chunk in absolute dollars of the cost of running government. What matters is that they must pay more; 39.6 percent instead of the 35 percent they now pay.  Why don't we just make it a neat 50 percent? When is enough enough?

So, do I oppose a 4.6 percentage-point increase for the tax on upper-income Americans? Yes, because I'm not convinced that changing the status quo is best for the economy and the country. Have at it.

Tax form and pen

From Eric, to Dennis:

Why is it that the wealthy -- who are prevailing dramatically as the gap between rich and poor has continued to widen -- always bleat so self-pityingly about "class warfare"?

They're winning! Statistically, comparatively, the poor and working class have been the ones punished in the last 30 years as the top 1 percent of earners have roughly tripled their share of the nation's total income (to about 25 percent from 8 percent).

People everywhere -- not just Americans-- don't resent legitimately earned success. But they do resent tax and regulatory policies at all levels of government that concentrate wealth in a way that's unfair and destabilizing.

This debate is over a small increase for a small percentage of taxpayers that will ultimately provide a big boost to our nation's bottom line. Must we turn it into a proxy fight over the concept of progressive taxation?

Yes, taxes are redistributive. Always have been. Even under flat-rate systems, money moves from the prosperous to the needy and into programs and services for all. It's also confiscatory, given that paying taxes isn't voluntary.

Yet your side slings these accusations -- redistributive! confiscatory! -- as though they ought to end rather than start the conversation about taxes.

Who and what we tax and at what level determines what our society looks like and how it functions.

So let's keep our focus on the narrow question of "what's best for the economy and the country." 

Ideology and class resentments/sympathies aside, what top marginal rate will lift more people out of poverty, increase the gross domestic product and move the federal budget back into the black where it was during the Clinton years?

From Dennis, to Eric:

Yep, that's me; pimping for the rich.

As if I'm arguing that they should be taxed at the same rate as the poor. Which, in some cases, is zero. Or less than zero, if you count the earned income tax credit for low- and middle-income taxpayers.

Somehow, the impression is widespread hat the progressive tax system as we know it has made people rich at the expense of the poor. Not hardly. Studies cited by the liberal Center on Budget and Policy Priorities conclude that federal income taxes on middle-income families are at historically low levels. And that "federal income taxes on middle-income families have declined significantly in recent decades," thanks in part to the "Making Work Pay" tax credit in the Obama stimulus package.

The conservative Tax Foundation notes that if you measure the effect of the Bush tax cuts in the percent change in one's tax bill, then low-income earners got the most benefits.

So, it is difficult to follow the logic that blames progressive taxation for growing income disparities between rich and poor. Also, it's a mistake to leave the impression that the Obama tax plans will result in only a "small upward tweak." There's another way to increase taxes, by manipulating deductions and exemptions selectively in a way to fall heaviest on higher earners. Restoration of the so-called "PEP and Pease" provisions under the Obama proposal and the absence of debate over those issues of deductions and exemptions tell me that much of this debate is ideological, not based on reason or facts.

I'm not against the selective Obama tax increase because I feel sorry for the rich. Truth is, I really don't care what the rich pay, but what they do pay should be based on rational public policy.

From Eric, to Dennis:

Then you should be with me on allowing the Bush tax cuts for the wealthiest Americans to expire.

The non-partisan Congressional Budget Office has noted that high-earners are less likely than any other group to spend their tax-cut bounty, so keeping their rates low is one of the least efficient ways of generating jobs and growth.

Returning to 1990s rates -- which are still low by historical standards, lest anyone see this as creeping socialism -- will generate an estimated $350 billion over the next 10 years.

Put that money toward any number of other uses -- infrastructure repair, relief to the states or business tax credits, for example -- and the positive jolt will be greater than if it ends up in the pockets or investment portfolios of the well-to-do.

The Center on Budget and Policy Priorities, since you mention it, strongly endorses letting tax cuts for the highest earners expire for these and other reasons. The center's economists argue that the impact on small business owners will be minor in the short-term and beneficial in the long-term by helping the overall economic rebound.

I'm no expert. I admit I thought PEP and Pease was a chain of auto-parts stores before I Googled it.

But after reading at length from experts on both sides (see my webliography of sources here), I've come to see raising the top marginal rate as a practical compromise.

You and your think-tank allies won't agree. But  I hope you agree that this  a fascinating, challenging debate that's too important to turn into another shallow battle of slogans and demonizing caricatures.

Finally, if you don't think tax policy at all levels is the major reason for the increasingly alarming divide between rich and poor in this country, I'd like to know what you think is.

From Dennis, to Eric:

It's not just me or one of my "think-tank allies" who blames other major reasons for income disparity. I give you the U.S. Census Bureau. Wage inequality, it said, reflects changes in the labor market and in "society's living arrangements."

The latter include failed marriages, out-of-wedlock births, increasing numbers of single parent households and other factors that tend to be associated with lower household incomes.

That was a 1998 report, but those trends have been exacerbated. The point is underscored by a more recent analysis by the Center on Budget and Tax Priorities that acknowledges "changes in federal taxes have had some influence" (emphasis added)."

But it concludes, "most of the divergence in income patterns among various income groups reflects diverging outcomes in the income that they received before taking changes in federal tax policies into account." (emphasis added)

And this from the U.S. Census Bureau: In real income, the percentage of people in poverty has steadily declined -- to 13.2 percent in 2008, from 14.2 percent in 1967 and 22.4 percent in 1959. That tells me the income growth at the top did not come at the expense of America's poorest.

In other words, you're attributing a cause for a phenomenon that may not even exist.

 Some Americans grow wealthier, by luck, hard work, blessed circumstance, ability or whatever.

 You're suggesting that a "small, upward tweak" in tax rates for higher-income earners "will lift more people out of poverty." How is never explained. Nor do I see how it will, as you said, "increase the GDP and move the federal budget back into the black."

That will take more sensible and realistic spending policies, including, I should say, more tax breaks for everyone.

This column also appeared in the Chicago Tribune

Comments

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  • Eric is blabbering the same old blubbering from the left,Stick it to em. A tax cut of any prcent of nothing is nothing.Maybe if these "people" who pay zero had a little skin in the game I could maybe go along with your reasoning.Sooner or later you are going to run out of other peoples money.The idea of washington spending less never occurred to you.Send them less,we as tax payers already know that.If your looking for a little more social justice try legislating childrens cancer.

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