The Rich Can Afford To Pay More Taxes - Says Former Reagan and Bush Official

An epidemic of reasonableness appears to have broken out in conservative political circles.

First, Republican Presidential candidate Jon Huntsman comes out in support of climate change and evolution. Then, former Reagan/Bush Treasury official Bruce Bartlett - who has also worked for libertarian icon Ron Paul - publishes an article yesterday (August 23rd)claiming not only that the wealthiest tax payers can afford to pay more, but that they should. How much, you ask? Oh, about as much as they did under Reagan.

What's going on here? First, a recognition that the Wall Street and Oil Patch tycoons who control Republican finances have been 'talking their book,' finance parlance for presenting a scenario that benefits their own investments and no one elses. With the global economy in disarray and the US on the verge of a nervous breakdown, economically speaking, there is a growing belief in some conservative quarters that failure to address the larger business and social malaise will redound to the Republicans' long term discredit. Further, with Asian countries maintaining a tight grip on their economies and Europe moving to quash perceived financial excesses, there is concern that the US will be increasingly isolated from a policy perspective which could hinder the dominant position of its capital markets.

Billionaire investor Warren Buffett opened this debate with his call for more taxes on people like him. Despite his affable 'aw shucks' persona, he appears to have struck a calculated and heavy blow to the negotiation rejectionists who have dominated the economic debate for the past year. JL

Bruce Bartlett comments in the Economix blog:

Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits.

It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent).

Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with.

On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. It looked at several options, including a 50 percent top rate on incomes over $1 million and changes to the taxation of dividends and capital gains.

Tax Policy Center, Aug. 19, 2011
As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013. Moreover, dividends on corporate stock would go back to being taxed as ordinary income. And capital gains would go back to being taxed at a maximum rate of 20 percent.

The larger question is how much the well-to-do should pay. According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since.

If this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.

Internal Revenue Service
Of course, these are not hard numbers. If the effective tax rate had stayed at 33.1 percent on the top 1 percent of taxpayers all these years, their behavior would undoubtedly have changed.

And it probably would have been impractical to maintain a higher rate on just the top 1 percent of taxpayers without having had higher rates on many of those below that percentile. But it does show the order of magnitude of how much revenue has been sacrificed from tax cuts on those with very high incomes.

Some will argue that those tax cuts bought higher economic growth, but that is very doubtful. Growth was stronger in the 1990s when the relative revenue loss was small and was dismal during the George W. Bush administration, when two-thirds of the aggregate revenue loss occurred.

Higher effective tax rates on the rich could even be achieved without raising the top tax rate bracket to 50 percent, as it was under President Reagan. There are many tax preferences that largely benefit the well-to-do that could be scaled back to avoid raising marginal rates.

The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay at a time when total revenues as a percentage of G.D.P. are at their lowest level in 60 years and we are facing a debt crisis. The issue is not whether the rich should pay more, but how best to accomplish it.