Tags: Tax | Rich | economy | bush

Tax the Rich, Problem Solved? Not Really

Friday, 02 March 2012 12:24 PM

As the president and the Congress careen toward an election-year end game with trillions in debts and gaping annual deficits, pressure is rising to do something, anything, to begin paying.

Automatic cuts totaling $1.2 trillion, to be spread equally between defense and domestic spending, hang over Washington, and it appears that another debt-ceiling fight could happen before Election Day.

While “tax the other guy” is the stock answer going back centuries, it raises the question: Is there enough money at the top to meeting the nation’s apparent spending needs?

Almost certainly not, a new study shows.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2012

The Pew Charitable Trusts and the Tax Policy Center looked at two scenarios, one assuming that the Bush tax cuts, payroll tax cuts, and other provisions that offer short-term tax relief expire on time.

In the second scenario, researchers assumed that the temporary cuts were extended, a distinct possibility if the economy begins to wobble and Congress seeks a quick way to shoot money into consumers’ pockets.

In the study, the goal is to move the debt from its current position above 100 percent of GDP back down to 60 percent, using tax rates effective in 2015 with targets of 2020, 2025, or 2035. Either tax rates or GDP (and thus total tax collection) must rise to make it work — or spending must be slashed to compensate.

We don’t make it.

If the Bush tax cuts and the Alternative Minimum Tax exemption are extended (but not the payroll tax break), the top individual tax rate would need to be between 43.6 percent and 45.4 percent, the study reports. It’s not just taxing the well-off: All of the lower rates would need to climb across the board.

If taxes are raised only on the top three brackets but dividends and capital gains taxes are left the same, the top income rate would have to surge to make it up, to around 90 percent. That assumes the richest Americans won’t defer income to avoid the hit.

If the Bush tax breaks expire and the automatic cuts take place as scheduled, you still end up with a similar top rate of around 45 percent and the corresponding higher rates on everyone below that mark.

Raising rates on just the very wealthiest but leaving investment taxes alone would necessitate a top rate of up to 57.7 percent, assuming the breaks go away, closing in on double the current top tax rate of 35 percent.

The highest U.S. tax rate was during World War II (94 percent), although top tax rates were routinely above 90 percent through the 1950s and early 1960s.

They fell to current low levels only in the final years of the Reagan presidency.

Even by “increasing the top three and two income tax rates, respectively, top rates approaching 100 percent would not raise enough revenue to meet the debt-to-GDP goal of 60 percent in some or all of the target years,” the researchers concluded.

As a result, “raising the top income tax rates would need to be combined with spending reductions or other revenue measures to meet debt-reduction goals in the specified target years,” they wrote.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2012

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Friday, 02 March 2012 12:24 PM
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