Tyrus W. Cobb: Should tax rates have been raised in exchange for deep spending cuts?
Submitted by admin on Thu, 08/11/2011 - 4:00am
A key aspect of the recent virulent debate over the debt ceiling had to do with the question of raising tax rates, at least on the super-wealthy, in exchange for deep cuts in government spending. Before we can evaluate the pros and cons of that “grand compromise,” let's look at current tax rates and understand who pays what income taxes.
Today, individuals — at all levels — are paying the lowest tax rate any of us can remember. This also means that Americans collectively pay less in taxes as a percentage of Gross Domestic Product than at virtually any time in history, resulting in a severe downturn in government revenues.
However, as revenue from income taxes has declined, spending has soared. Govern ment expenditures have been on a significant rise, particularly in the last two years. This historically high rate of spending and low rates of taxation have combined to produce a string of deficits that are the highest since World War II. As a result the government is borrowing about 36 cents of every dollar it spends.
Ironically, while top earners are taxed at rates lower than at any time in history, the revenues collected from this narrow group have soared. Today the top 1 percent accounts for fully 40 percent of the collections, and the top 5 percent, more than 60 percent. The top 50 percent contributes over 97 percent of the total, while the bottom half provides less than 3 percent. Meanwhile, 47 percent of all Americans do not pay any federal income taxes.
In California, nearly half of the income taxes collected before the recession came from the top 1 percent of earners. The Golden State continues to increase its dependence on income taxes, which now account for more than half its general revenue, up from one-third in 1981. And, as at the federal level, these collections are increasingly from the very wealthy. This means that California's future is no longer tied to the broader economy, but to a small group of ultra-earners.
Whether there is a correlation or not is subject to debate, but while tax rates have fallen, the incomes of high earners have soared. More than 65 percent of all recent income growth in the United States has gone to the top 1 percent of the population. The working class and the middle classes have seen virtually no real income growth.
The crux of the debate today is whether the tax rates are too low, at least on the “super wealthy,” who, some feel, should be contributing more. On the one hand, despite historically low rates, the very wealthy are already paying a much greater share of the total federal income tax collected. But given growing income disparities in the U.S., many feel that the super-rich, defined as that 0.1 percent of the population with average annual incomes of over $27 million, should be paying more.
It does seem to me that raising all of our tax rates slightly is necessary. I would also propose that there be both a minimum and maximum rate for all taxpayers, so that everyone would at least pay some income taxes. For the lowest bracket, the rates could range from 1 percent to 10 percent.
Further, I do believe that we could raise the top rate to 39.6 percent without causing the super-wealthy to lose much sleep. And if that were coupled with the $4 trillion in spending cuts that were discussed during the debt ceiling debate, I think that would have been an excellent tradeoff. For me, achieving $4 trillion in spending re ductions over the next few years in return for shifting the tax rate on the very highest incomes to 39.6 percent from 35 percent would have been a worthy “Grand Compromise.” Alas, it did not happen!
A lost opportunity?
• Tyrus W. Cobb is former special assistant to President Ronald Reagan.
