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Hullabaloo


Thursday, February 21, 2013

 
No, we don't need more regressive taxes

by David Atkins

Ezra Klein has a habit of beginning with some genuinely honest, non-conventional-wisdom arguments in his posts, then concluding with some nonsensical both-sides-do-itisms that almost invalidate the excellent points with which he began. That was the case with his critique of Alan Simpson, in which his takedown of Simpson ended with a bizarre paean to the necessity of immediate deficit reduction. And it's the case with his latest post on how the tax debate has shifted right with President Obama's help.

Klein cogently begins by noting that the President's centrism combines with the Republicans' hard right turn to shift the entire debate toward conservatism. But then he ends with this:
“One of the problems the president has is his promise that there won’t be a tax increase on anyone below those income levels,” says Alan Viard, a tax specialist at the conservative American Enterprise Institute. “It’s a straitjacket. You have to have some increase in tax burdens or benefit cuts on people making less than 250,000 to close the fiscal gap.”

That pledge made the kind of revenue numbers envisioned by Simpson and Bowles or Domenici and Rivlin in their respective plans — both of which do increase taxes on some Americans making less than $250,000 — effectively impossible. And it set up a new, and much more cramped, zone of the possible on taxes, where the Republican position is that taxes shouldn’t be raised on anybody, and the Democratic position is that taxes shouldn’t be raised on almost anybody.

This is a dramatic change in negotiating postures, says Bob Greenstein, President of the liberal Center for Budget and Policy Priorities. “Many people forget that when the Reagan tax cuts turned out to lose far too much revenue, the leader in scaling back the revenue loss in 1982 was Bob Dole, a Republican! It’s as though with each iteration of the debate the contours sort of shift a bit further to the right in terms of revenue.”

Yet even as the tax debate has moved to the right, the spending debate has moved to the left. Republicans today promise to leave Medicare and Social Security benefits untouched for at least the next decade. They also want to increase defense spending above its current levels and are beginning to make their peace with the permanence of the Affordable Care Act, which Boehner now calls, pointedly, “the law of the land.”

The consensus on spending, in other words, requires a very different consensus on taxes — or vice versa. “If we keep Social Security, Medicare and Medicaid largely unchanged, we’re going to need a significant amount of additional revenue,” says Viard. “In fact, we’ll need additional revenue even if we curtail them somewhat. It’s just not realistic to think we’ll cut their growth enough to not need more revenue. And some of that revenue is going to have to come from the bottom 98 percent.”
Not mentioned once in Klein's piece is capital gains income, which is at the heart of the hollowing out of the American economy in favor of assets over wages, and at the heart of economy-destroying income inequality.

Greg Sargent analyzes a new study on inequality and makes the following observation:
Here’s what Hungerford found: The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.

This finding is directly relevant to the current debate, because Obama and Democrats want to offset the sequester in part by closing loopholes enjoyed by the wealthy, such as the one that keeps tax rates on capital gains and dividends low. Dems want to do this in order to prevent a scenario where the sequester is averted only by deep spending cuts to social programs that could hurt a whole lot of poor and middle class Americans. Republicans oppose closing any such loopholes and want to avert the sequester with only deep spending cuts...

In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. There’s a lot of that money out there that could be taxed as ordinary income — as Obama and Dems want — as a way to avert the sequester, which could badly damage the economy. Republicans oppose this.
Kevin Drum also notes:
Bottom line: If you care about rising income inequality, you should care about capital gains because that's mostly where the skyrocketing income increases of the past couple of decades have come from. And while the fiscal cliff deal raised rates on capital gains and dividends slightly, there's still plenty of room for them to go up more. Done within reason, this is very unlikely to have a negative impact on economic growth, and it would be about the fairest possible way to increase revenues.
So no, "failing" to increase regressive taxes doesn't drive the economic debate to the right. America should try clawing back some of the inordinate wealth that has been stolen by the top 1% from everyone else, and wait for natural deficit reduction due to increased confidence and economic growth, before considering regressive tax increases. Doing even more damage to those who are already hurting accomplishes nothing given our record income inequality.

That, too, is another form of harmful austerity.


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