Commentary | Republicans are beginning to say that it is their “patriotic duty” to violate Grover Norquist’s Taxpayer Protection Pledge in order to avoid the Fiscal Cliff. According to Fox News, Senator John McCain (R-AZ) is among the latest Republicans to be added to this list, saying on Sunday that he wants to close so-called tax “loopholes” to raise revenue instead of raising the $250,000 top marginal tax rate. Like Lindsey Graham (R-SC), McCain’s loopholes would include deductions on charitable donations and on mortgage interest, which primarily affect ultra rich investors. But what if instead of complicating the tax code further Congress were to create a new tax bracket for the ultra rich?
Americans for Tax Reform President Grover Norquist often points to Reagan when calling for lower taxes and spending cuts. He claims that “tax hikes are what politicians do when they don’t have the determination or the competence to govern.” On the other end of the spectrum you have those like Joe Scarborough who says that low tax rates for the rich are “immoral.” Keep in mind that the goal is to avoid the fiscal cliff and prevent an economic meltdown that could affect the poor and middle class, especially in Democratic states.
But just who is this rich we’re talking about taxing more? One factoid to keep in mind is that even if individuals earning more than $200,000 were taxed at a 100 percent tax rate the increase in revenue would come to $1.27 trillion, or just 77 percent of 2011’s deficit.
Are the rich the top ten percent of income earners? That can’t be since that would include a Minnesota policeman married to an executive level secretary, each making $56,000 a year and filing a joint tax return. The one percent has been maligned much lately in the press, but they don’t make as much as you might think. (It helps to visualize this economics information.)
For 2009, according to US News to be included in the top one percent you had to report an Adjusted Gross Income (AGI) of just under $344,000. That same year, the top one percent paid 37 percent of federal income taxes. The top 10 percent paid 70 percent, and those in the top half paid almost 98 percent of all federal income taxes. That means the bottom half paid about 2 percent. In fact, 47 percent of households pay no federal income taxes (which is where Romney derived his 47 percent comment).
You also have to keep in mind that federal taxes are levied uniformly. So someone struggling to get by in New York City might be making six figures easily whereas someone living large in the south could live off half of that amount. The other major factor is that the US Dollar is devaluing fairly rapidly due to the Federal Reserve’s plan for quantitative easing, also known as QE3. It might not be too long before the cost of living rises to the point that a larger percentage of the US population is making more than $250,000. Sure, Congress might lower the taxes on us new “rich” at that point in the future, but do you want to risk that?
Because of these reasons I say keep the $250,000 tax bracket where it is. Instead, if Republicans are going to cave they should consider creating a new top-bracket marginal income tax rate specifically designed for the ultra rich. Once you reach this level of income there tends to be a sudden jump in income levels, a divide between the upper middle class and the true rich. We’re not talking about the one percent…we’re talking like 0.1 or 0.01 percent here. So I would suggest making this figure fairly high. I also agree with the newest version of the Buffett Rule, which proposes a minimum tax percentage that can’t be chipped away at by tax write-offs, but honestly that’s a drop in the bucket since it’s only expected to bring in $3.2 billion a year.
Secondly, the tax code probably should be revised to take into account small businesses. Small businesses account for 99.7 percent of employment in the US and create more than 50 percent of GDP. Because 48 percent of small business income flows through to personal income taxes I say that the tax code needs to make a distinction and create a separate tax bracket specific to those 48 percent.
If Congress does decide to keep the tax brackets as they are the only way Republicans should cave in is if the extra percentage of revenue is declared by law to be only for paying off the national debt. Historically, this only makes sense. Congress has a history of raising taxes to fix their budget woes by increasing revenue only to increase their spending beyond the new revenue increase. This happened under both Ronald Reagan and Bush Senior, where a Democratic Congress made promises they never kept.
At the beginning of his presidency, you may be surprised to learn that Ronald Reagan initially allowed a bipartisan Congress to raise taxes to pay for government-run health care. But many taxes were slashed during the Reagan presidency. The top-bracket marginal income tax rate was one of them, going from a whopping 70 percent all the way down to 28 percent, just to be bumped back up shortly later. Under Bush Senior the Democratic Congress promised to cut spending if taxes were increased by that did not happen.
So McCain may have joined the new Republican bandwagon for violating the no new tax pledge but it does not appear like Congress is much closer to avoiding the fiscal cliff. Unfortunately, both parties are bickering over changes that won’t fix the overall budget problems instead of fixing their spending addiction. What new ideas do you think both parties should consider for avoiding the fiscal cliff and solving the deficit/debt problem?