Column, 631 words

Shouldn’t We Base Our Tax Policy on More than Hunches?

Sam Pizzigati

In January, Congress raised the top marginal tax rate on income over $450,000 from 35 to 39.6 percent. But even with this boost, that top federal rate is still less than half of what it was back in the Eisenhower years.

Given the growth of the nation’s debt, we need the rich to contribute their fair share. What to do? Some Democrats in Congress — members of the Progressive Caucus — want to raise the nation’s top tax rate appreciably higher, up to 49 percent on annual income over $1 billion.

But no big-time lawmakers in either party support taxing the rich to that degree.

Republicans typically claim that higher rates would undermine the incentive to work, save, and invest. GOP hardliners even balk at moves to shut tax loopholes. Any step that hikes tax bills, they hold, invites calamity.

Pizzigati-tax rates-Cory M. Grenier

Cory M. Grenier/Flickr

So-called “moderate” Democrats, for their part, generally consider higher tax rates and moves to close loopholes an either/or proposition. Instead of raising the current top rates on the highest incomes, they argue, Uncle Sam should keep them modest. Applying these modest rates to the broader tax base created by limiting loopholes would raise more revenue.

Not all these lawmakers, of course, agree on what constitutes a loophole. Many Wall Street-friendly Democrats, for instance, gag at the thought of ending the enormously lucrative tax break for capital gains, the profits from trading stocks, and other assets that flow overwhelmingly to America’s richest.

The bottom line? There’s a bipartisan consensus in Congress on raising top tax rates any higher than their current pre-Bush levels. That consensus: don’t do it.

Few lawmakers dare challenge this conventional wisdom. But their timidity makes no sense. The current consensus against higher top tax rates, as analyst Andrew Fieldhouse details in a study that the Economic Policy Institute and the Century Foundation just released, rests on an amazingly shaky foundation.

Fieldhouse walks us through recent research on top rates and readily demolishes conservative claims that high taxes on high incomes will doom America to economic despair.

Tax rate reductions since the 1970s, the evidence shows, haven’t strengthened the economy. They’ve had “a statistically insignificant impact” on savings, investment, and other factors that drive economic growth.

Fieldhouse also shows — and this may be his most politically significant contribution — that efforts to broaden the tax base and raise top tax rates can and should go hand in hand. He makes that case using the concept of taxable income “elasticity,” economist-speak for how the income taxpayers report may rise and fall with changes in tax rates.

This elasticity — how taxpayers behave at tax-reporting time — depends in large part on the loopholes the tax code offers.

If loopholes beckon at every turn — and efforts to enforce the tax code remain lax — wealthy taxpayers just step up their tax-avoidance ploys when tax rates rise. The IRS ends up collecting less revenue than the agency would have garnered had the wealthy paid what they owed.

By contrast, if Congress seriously went after loopholes — and budgeted for stronger enforcement — wealthy taxpayers would have fewer avoidance options. The revenue collected from higher tax rates would increase.

In sum, Fieldhouse writes, “base-broadening tax reform and higher marginal rates should be seen as complements, not substitutes.”

The payoff if we do both? Oh, not much: just more tax revenue to fund programs that help average American families, a stronger overall economy, and a meaningful pushback against growing economic inequality.

Hiking tax rates on our highest incomes back near the levels in effect decades ago, Fieldhouse’s new study helps us understand, would make wonderful sense economically.

Whether this move ever makes political sense to America’s lawmakers depends, of course, on the rest of us — and the political pressure we choose to bring to bear.

OtherWords columnist Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org

  • http://www.facebook.com/lalnaper Lori Lathrop

    Sam – BRAVO this was the BEST article you have written so far!!! Interesting it comes close to the death of Margaret Thatcher – who said, “Let the rich get richer…” and “there is no such thing as society.” Perhaps it was her policy or the war in the Falkland Island that brought about an economic up swing for Britain after a short period of people being seriously put out… – the kids wanted their free milk – they didn’t like having to work for it…..

    If the government needs to generate more revenue and stop inequities they should stop tax deductions for people who have more than TWO kids – after all population is out of control – perhaps we should use our taxing system to discourage people from having too many kids….(population control) just think of how much money that would generate, probably as much as you would get from taxing only 5% of American’s (the wealthiest) (5 to 10) percent more than what they are already paying – - let’s get the extra taxes from the majority AND discourage people from having too many kids. Why should I have to pay MORE tax because I have less kids than someone else – it’s NOT FAIR and EQUITABLE – and I have to pay just as much property tax as someone putting six kids through my local high school when I am only putting one through – this is not equitable! So were should we start and stop with trying to make things equal for everyone Sam???

  • talferris

    I’ve read this article…twice. I tried to see the connection between “Let the Rich get Richer…” unless its the continuation of that parable, “…while let the poor get poorer.” I also fail to see the connection of the Argentinians trying to capture the Falklands as it relates to American Economic Policy. Maybe it’s just not for me to see or understand.
    It does seem though that we should pity this downtrodden and misunderstood affluent person. The burdens they must bear on behalf of the nation. The fact that they are forced to fund a social programs they personally receive no benefit from. The fact that they are forced to pay property taxes on the property they own, not on the number of kids they may or may not send to public school. They fact that they engage rhetorically and philosophically in population control because they, perhaps, may one day be inconvenienced in some way.

    Indeed, the burdens they must bear…for which there is no benefit. There is nothing in it for them. They see no profit nor advantage from the laws and policies of the this nation. No, all the nation does is take and try to take from them even more than it does now. How can we allow this to happen to the wealthy and affluent among us? We all know it is they that know best. It is they who have our best interests at heart. It is they who should reap every benefit and every reward to be offered. It is they who should be allowed to keep more of what they earn…because they deserve it and have worked hard for it. Because in their eyes, no one else works. No one else pays taxes or bills. No one else is deserving of anything. After all, they must eat cake! How dare anyone else expect to do so.