- The Washington Times - Thursday, April 15, 2010

Taxing wealthier people is back in style with Democrats in the White House and running Congress, but the government’s fiscal house is in such disarray that even that well-trodden path will prove to be no cure-all for the nation’s soaring $1 trillion budget deficits.

Estimates by nonpartisan groups such as the Urban Institute and Tax Policy Center show that without any serious efforts to cut spending, tax rates on the wealthiest people earning $200,000 or more — the group targeted by President Obama — would have to rise to prohibitive levels of between 77 percent and 91 percent just to bring the yearly budget deficit down to manageable levels of around 2 percent to 3 percent of economic output.

Despite those estimates, the trend toward raising taxes on higher-income earners is well under way. Mr. Obama’s health care reform program nearly doubled the Medicare tax on people earning more than $200,000 and subjected their investment income to the health care tax for the first time.

The health program adds to what is already a steeply progressive tax code by using the upper-income tax revenues to subsidize health care for people with incomes under $50,000 — the same group that currently pays little if any federal income taxes.

In fact, thanks in part to Mr. Obama’s “making work pay” tax credit enacted last year, only about 3 percent of families with incomes under $50,000 will pay any federal income taxes this year, although most of those will continue to pay Social Security payroll taxes, according to estimates by Deloitte Tax and the Tax Policy Center.

Meanwhile, Mr. Obama’s budget proposes letting the tax rate on people with incomes of more than $200,000 revert to Clinton-era levels between 36 percent and 39.6 percent at the end of the year when President George W. Bush’s tax cuts expire. And a myriad of proposals have emerged in Congress to further tax the same group to pay for everything from education to clean energy.

With taxes due Thursday, these statistics are enough to “make your blood boil” if you’re in the top 53 percent, said Ned Brines, analyst at the Seeking Alpha market research Web site. “Id say ‘the rich’ are certainly paying their fair share.”

The nearly half of U.S. citizens who paid no federal income taxes last year is up from around 40 percent of non-payers just five years ago, suggesting that the long-standing trend toward tilting taxes toward the rich is gathering speed, he said.

“At this rate of increase, by 2012 the majority of voters won’t be taxpayers,” yet many of them will be getting benefits from the government, Mr. Brines said.

As seen in the recent health care debate, tax increases on higher-income groups usually are justified as a matter of equity and justice, with the revenues funneled into benefits for people with lower incomes to buy health insurance, feed and shelter their families, among other worthy causes. Given that history, to assume that any future tax increases will be devoted to reducing the deficit could be a stretch.

Nevertheless, the debt crisis erupting in Europe among countries with heavy debts like the U.S. is putting pressure on Washington to do something about the deficit. Moreover, Congress will be confronted with a mandate to address the deficit this fall when a presidential commission charged with recommending ways to reduce the debt will report its findings — auspiciously just as most of Mr. Bush’s tax cuts are expiring.

The commission is widely expected to find that the only alternative to major tax increases will be drastic curbs in spending on popular spending programs like defense, Social Security, Medicare and Medicaid. And much of the biggest potential savings in Medicare already have been used to help finance Mr. Obama’s expansion of health care.

Without any serious move to curb spending in such programs, Congress would have to broadly raise taxes to reach Mr. Obama’s goal of bringing budget deficits down to 3 percent of the gross domestic product by 2020 — the minimum effort economists say is needed to avoid financial instability and a debt crisis in the future.

According to the Urban Institute, taxes would have to rise by about one third for everyone who pays taxes — a scenario that would raise the top tax rate to 48 percent. But if taxes are raised only on the two highest income brackets, the top tax rate would have to rise to nearly 77 percent. And if a more ambitious goal were adopted to reduce the deficit to 2 percent of economic output, the top tax rate would have to rise to 91 percent, the institute estimates.

David Greenlaw, economist with Morgan Stanley in New York, said that those figures show the daunting challenge facing Congress.

“Eighty-five percent of the current budget consists of defense, entitlements and interest on the debt — implying that it is very difficult to achieve meaningful deficit reduction on the spending side alone,” he said. “Similarly, it’s difficult to make significant progress by tinkering with tax rates on upper-income individuals.”

Raising taxes to prohibitive levels would set off a cottage industry for tax shelters and tax loopholes that would enable rich people to avoid paying such high taxes, he said.

Since either huge spending cuts or soaring tax rates would create both political and economic problems, it is little surprise that some experts like former Federal Reserve Chairman Paul A. Volcker, an Obama administration economic adviser, are suggesting a value-added tax — a kind of federal sales tax — as an alternative, he said.

Kim Whalen, economist at Wells Fargo Securities, said there is little alternative to reining in the government’s massive retirement-benefits programs, even though such a move will become even harder politically as more and more baby boomers retire in coming years.

“Supporting them in their current form is one option, but the increased taxes and/or reduced spending in education, defense and other areas will be the extremely high cost,” she said.

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