Taxes, Jobs and The Deficit

What's a policy-maker to do?  Forget whether it even makes sense to try to stimulate jobs and/or reduce the deficit, the public demands both.  So do you let the Bush Tax Cuts expire, extend them for all, exclude the wealthy? 

Let's ask Bruce Bartlett, former Reagan Economic Advisor (from his blog):
Anyone who thinks that raising the top rate to 39.6 percent, as President Obama has proposed, will produce less revenue than the current top rate of 35 percent produces is nuts. Rich people are not going to quit working or make a significant effort to hide income or engage in tax-sheltering activity at that rate. We know this with certainty because the top rate was 39.6 percent during most of the 1990s and we did not see that happening. It's worth remembering also that the top rate was 50 percent during the Reagan administration.

What does Robert Reich, Clinton's Labor Secretary have to say:
From a strictly economic standpoint – as if economics had anything to do with this – it makes sense to preserve the Bush tax cuts at least through 2011 for the middle class. There’s no way consumers – who comprise 70 percent of the economy – will start buying again if their federal income taxes rise while they’re still struggling to repay their debts, they can’t borrow more, can no longer use their homes as ATMs, and they’re worried about keeping their jobs.
But the same logic doesn’t apply to people at the top, earning over $250K, who represent roughly 2 percent of tax filers. Restoring their marginal tax rates to what they were during the Clinton administration (36 and 39 percent) won’t inhibit their spending. That’s because they already save a large portion of what they earn, and already spend what they want to spend. (During the Clinton years the economy created 22 million net new jobs and unemployment dropped to 4 percent.)
But restoring those top marginal tax rates will help bring down the long-term debt, pulling in almost a trillion dollars of revenues over next ten years. That’s not nearly enough to make a major dent in the nation’s projected deficits, but it’s not chicken feed either. It would at least signal to financial markets we’re serious about cutting that long-term deficit – and the rest of us will chip in when the economy strengthens.

What About A Flat Tax?
Any discussion of tax reform should include an open-minded discusion of the flat-tax.  We can all agree that the current tax system is messy, and the flat tax seems so simple and "fair."  But fairness is always in the eyes of the beholder.  If we switched to a flat tax today, it would create a massive transfer of wealth from the poor and middle-class to the wealthy.  We have 40 million Americans living in poverty, and many middle-class Americans living on the edge.  Adding to the tax burden of most Americans just to simplfy the the tax system and create the patina of "fairness" for the wealthy would not be smart.

Clemson University economics professor Holley Ulbrich, a longtime foe of the flat-tax, who asks: how would you feel about losing your mortgage-interest deduction on your taxes? She warns of:

"...the disruptive effect of eliminating deductions, credits and exclusions that benefit the middle class as well as the rich and that play important roles in our lives—pension contributions, employer-provided healthcare, and deductions for mortgage interest, property taxes, and charitable contributions that support everything from soup kitchens to education to the arts. A flat tax would shift tax obligations from the rich to the poor, and especially the middle class, and eliminate desirable tax incentives for retirement savings, home ownership, and charitable contributions. Simple? Yes. Efficient and equitable? Not so much."

What about fairness to the wealthy?
My friend Jeff is concerned that "unfairly" taxing the wealthy who only comprise 2% of the population, and thus have a small electoral voice, is taxation without representation. 

Again Robert Reich speaks:

"Not only is income and wealth in America more concentrated in fewer hands than it’s been in 80 years, but those hands are buying our democracy as never before – and they’re doing it behind closed doors.

Hundreds of millions of secret dollars are pouring into congressional and state races in this election cycle. The Koch brothers (whose personal fortunes grew by $5 billion last year) appear to be behind some of it, Karl Rove has rounded up other multi-millionaires to fund right-wing candidates, the U.S. Chamber of Commerce is funneling corporate dollars from around the world into congressional races, and Rupert Murdoch is evidently spending heavily."

The wealthy have always had political access and influence far beyond their numbers.  They have done very well in the past few decades, accumulating wealth as never before.  It was not the poor and middle-class who have over time moved the top-rate from 91% under Eisenhower to 35% under Bush.  It was not the masses who lobbied Congress successfully to ensure the income of hedge fund managers are taxed at cap gains rates.  No, the wealthy are doing just fine ensuring their interests are represented, buying votes with their campaign contributions.