Why Do We Have to Raise Taxes on the Rich?

by Douglas Holtz-Eakin

It has become standard wisdom that tax increases on the rich are a necessary part of any bipartisan deal to avoid federal financial meltdown. It is simply not possible to talk to any member of the media about the substantial problems in Social Security, Medicare, Medicaid, the Affordable Care Act, or other entitlements without the first response being “but don’t revenues have to be on the table?” Why?

It’s not like the numbers work. Obama’s budget itself proves that. The projected Obama budget deficit (as priced by the Congressional Budget Office) in 2021 is $1.2 trillion — and this assumes that the economy is back to full employment and that Obama has successfully raised taxes on rich people (which currently raise only $46 billion annually).  Raising taxes just is not a serious solution to the debt explosion.

It’s also not good tax policy. If the U.S. is going to effectively slay the twin evils of unemployment and fiscal unsustainability, it will have to grow as fast as possible. Now fair-minded analysts can disagree about the growth consequences of raising taxes on individuals and small businesses, but one can’t conclude that they arepositive. (The only ones who do are those that willfully ignore the late 1990s dot-com bubble and claim that the Clinton top rate “caused” growth.) The best-case scenario is that the negative impacts are small. But it is unquestionably a move in the wrong direction.

It is also contrary to the stated desire of the president, his Bowles-Simpson Commission, the House budget, the chairman of the Ways and Means Committee, and the chairman and ranking member of the Senate Finance Committee to achieve fundamental tax reform. Tax reform means lowering rates and broadening the base. These proposals raise rates and make tax reform harder. 

Growth issues are paramount at this juncture, but some will insist that the proposals are needed as a matter of fairness — the rich should pay for their fair share of government. I find this absolutely bizarre. For most Americans, the largest tax they pay is the payroll tax. But those taxes fund Social Security and Medicare, and the vast majority of those paying will get back in benefits dramatically more than they are paying in, so they come out ahead. 

Paying for the rest of government, that is, everything envisioned by the Founders — national defense, infrastructure, basic research, education, etc. — plus subsidizing the entitlements relies on the income tax. As has been well documented, 51 percent of Americans pay no income tax, and the top 5 percent pays nearly 60 percent of the income tax. 

The bottom line is that a small minority is paying for all of the government Americans enjoy. Why is it fair that they be required to pay more?

Moreover, if you are obsessed with fine-tuning the ratio of contributions to government services for the rich, why not simply do the obvious and means-test more aggressively Social Security, Medicare, and other entitlements (e.g., farm programs)? This would be “fair,” address the real problem of spending, and improve growth. What am I missing?

This leads me to the sad conclusion that the only reason that taxing the rich has to be “on the table” is pure jealousy. Is jealousy really a good public policy? And why is it accepted as a “fact” by the mainstream media?

Douglas Holtz-Eakin is president of the American Action Forum.

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