There They Go Again: The ‘People’s Budget’ and High Tax Rates

By :: April 28th, 2011

Will Donald Trump bring Barack Obama’s birth certificate to the Royal wedding? I have no idea, but now that I’ve made our Web optimization folks happy, here is another question: What’s the deal with the People’s Budget, the fiscal plan released this week by 80 congressional progressives?

The answer is likely to drive less traffic than either The Donald or The Royals, but it is nonetheless worth exploring. After all, Paul Krugman called it, “the only major budget proposal out there offering a plausible path to balancing the budget.” Depends, I suppose, on what you mean by plausible.

The Congressional Progressive Caucus’ budget is, at 30,000 feet, the mirror image of the House-passed fiscal plan developed by Budget Committee Chair Paul Ryan (R-WI). While the House GOP budget shows what happens when you try to slash the deficit with only spending cuts, the left’s budget shows what happens when you just raise taxes and cut defense spending. 

Ryan would remake Medicare, cut projected Medicaid spending by $800 billion and other domestic programs by half over a decade—and  he’d still end up with a deficit of $400 billion in 2021. The progressives create impossibly high tax rates, and while they claim to balance the budget in 2021 (it is very hard to confirm their numbers), they almost certainly won’t after that.

While Ryan would cap taxes at about 19 percent of Gross Domestic Product, the liberals say their plan would generate revenues of 22 or 23 percent—roughly matching spending.   

Mimicking President Obama, their plan would retain the Bush-era tax rates and some tax credits for those making less than $200,000 ($250,000 for joint filers). In addition, it would protect middle-income families from the Alternative Minimum Tax for another decade.

Beyond that, the tax increases in this plan are breathtaking. It would restore pre-2001 income tax rates for those making between $200,000 and $1 million and create five new brackets for higher earners, topping out at 49 percent for those making $1 billion or more. Capital gains and dividends would be taxed at ordinary income rates for those making $1 million or more (up to 49 percent). It would also cap the value of itemized deductions for high-income taxpayers at 28 percent (another Obama idea), raise Social Security payroll taxes for both workers and employers, and raise the gas tax by 25 percent. There’s more, but you get the drift.

For businesses, the plan would leave the top corporate rate untouched at 35 percent, but tax financial transactions in various new ways. It would require multinationals to pay tax on foreign income as it is earned, ending the practice known as deferral where overseas income is not taxed until it is brought home. It would also raise taxes on oil, gas, and coal producers.

The problem with these very high tax rates, of course, is that the wealthy will find ways to avoid them. Some may incorporate and take advantage of those much lower corporate rates. Rich individuals will shelter or defer income, or find ways to move it (or themselves) offshore.  Corporations will surely decamp for tax havens.

I was disappointed that, beyond the 28 percent cap on deductions, the plan failed to tackle the $1 trillion in tax preferences that litter the revenue code. You’d think that liberals desperately seeking revenue might find ways to, for instance, make the mortgage interest deduction more progressive by turning it into a credit. But instead they seem happy to try to enhance tax fairness by merely raising rates on the rich—by a lot.     

Like most budget plans out there, this one is worthy of some praise.  Most important, it shows that even the Democrat’s left flank sees deficit reduction as a serious obligation. The debate has moved far enough along that even the progressives feel a need to get in the game. Good for them.

But the plan itself is deeply flawed and, sadly, profoundly conventional. Its greatest sin is that it lacks imagination. The authors of the People’s Budget knew their plan had no chance of ever becoming law. That should have liberated them to get creative. Instead, they remain trapped in the box that George Bush built for them.

15Comments

  1. Sid F  ::  7:24 pm on April 28th, 2011:

    “Like most budget plans out there, this one is worthy of some praise.”

    No, its not.

    This Plan is worse than useless, it is negative with respect to advancing the discussion and debate over the deficit, taxes and spending. It is not a serious effort. It would have zero Republican support, and probably not even a majority of Democrats would support it. It simply reinforces the stereotype (false) that progressives just want to tax the rich out of spite, meanness, envy or whatever. If this Plan were printed, it was a waste of trees, if it were published electronically, it was a waste of electrons.

  2. Serolf Divad  ::  10:38 am on April 29th, 2011:

    It’s the mirror image of Ryan’s plan, and that’s really the point, isn’t it? Anyone who’s ever negotiated knows: you start by demanding the black, your opponet starts by demanding white and you settle on gray.

    If the only two plans out there are Ryans and some middle of the road compromise, then the end result falls waaaa to far to teh right.

    Ultimately, we’re going to have to raise taxes to pre-2001 levels for everyone. Probably institute a new 50% bracket for millionaires. Tweak SS and Medicare, phaze out the mortgage interest deduction and a whole bunch of other things like that. But you don’t get there if you counter your opponent’s unreasonable demands with reasonable ones.

  3. Meritrus  ::  12:17 pm on April 29th, 2011:

    Sid F, the Ryan plan has zero support from Democrats, yet was described as not only “worthy” but “bold and courageous” even as it proposed dismantling the basic social contracts we’ve had in this country for more than fifty years. Now, as a centrist, I wouldn’t want to see the People’s Budget enacted, but I’m certainly glad it Is out there to show that there are concepts for balancing the budget that don’t utterly protect the rich while forcing the poor and (soon to be) elderly to bear the burden. How do you go about negotiating in your work? Do you start by proposing the minimum offer you’d find acceptable?

  4. km  ::  12:27 pm on April 29th, 2011:

    One thing about this plan that I didn’t see you mention. It is what polls show consistently that the vast majority want as a way to reduce the deficit: higher taxes on the wealthy and lower defense spending. Maybe that’s why they called it the People’s Budget

  5. BobN  ::  1:41 pm on April 29th, 2011:

    “The problem with these very high tax rates, of course, is that the wealthy will find ways to avoid them.”

    The problem is that you don’t actually show the brackets. I wonder why.

    As for avoiding taxes, it ain’t as easy as it was when Bush was encouraging folks to evade, pardon me, avoid taxes. What I hate about the “debate” we’re having in this country is all the dissembling. Anyone who knows anything about the tax code and how the IRS is limiting the ability to avoid taxes wouldn’t say the rich will take their money and run. They can’t anymore.

  6. Michael Bindner  ::  3:02 pm on April 29th, 2011:

    It’s no more useless than the RSC plan.

  7. Michael Bindner  ::  3:09 pm on April 29th, 2011:

    There are other imaginative plans out there, most of them including some kind of Value Added or Business Receipts Tax.

    Indeed, even one is covered – the one by the Bipartisan Policy Committee. The problem is, it has no official sponsors.

    The one by the Center for Fiscal Equity is even more imaginative, combining both libertarian and progressive elements. Again, no official sponsors, so no one gives it any attention.

    Even if the CFE plan is never enacted, it deals with the issues of taxing the wealthy, entitlement reform and Social Security in ways no one else does. Indeed, the Center’s treatment of these issues would, if addressed, become a game changer.

    No one is willing to score it, however, since it ultimately destroys the value of wealth – not by confiscating it but by making it unneccessary. Considering how the Think Tank Sector lives on foundation grants from the wealthy, with Brookings, Urban and TPC being no exemption, I can see why no one will touch it.

    That is what is all the more tragic.

  8. Michael Bindner  ::  3:10 pm on April 29th, 2011:

    If you think I am being harsh, score my plan.

  9. Sid F  ::  3:22 pm on April 29th, 2011:

    A couple of points.

    1. Those who think that we are in a negotiating activity are either unwilling or unable to accept the fact that the position of the Norquist Republicans is that they have pledged not to raise taxes for any reason, at any time under any conditions.

    2. The Ryan Plan is not “worthy” or “bold” or “courageous”. It is basically a fundamental change in the economic role of the federal government in the U. S. economic structure and involves a massive shift of costs from the wealthy to the poor, the sick and the elderly. But it has one big difference with the “Peoples Budget”. It has the support of and was passed by a majority of the House of Representatives.

    3. A position taken as a negotiating one that is so far removed from realilty as the so called “Peoples Budget” is not one that will ever be taken seriously, and hence diminishes rather than enhances the bargaining position of those who advanced it. In fact, a position which is described as a negotiating position rather than a sincere proposal will not be taken seriously.

    4. I agree that one does not enter into negotiations with one’s final position, (I have done a lot of negotiating in my day), but people need to understand what is under negotiation. It is not tax increases. It is only the degree and amount to which the social programs of the federal government will be dismantled and tax cuts for the wealthy will stay in place. (see the 2010 tax “compromise”, the 2011 budget “compromise” and see the coming “negotiations” on the debt ceiling and the 2012 budget. Do I hear $100 billion? $150 billion? $200 billion in spending cuts in programs that aid children, the poor, the sick, the elderly). And guess what, the President and the Democrats have already surrendered, it is just the terms of the surrender that are under discussion.

    http://www.washingtonpost.com/politics/debt-ceiling-more-democrats-threaten-to-vote-against-raising-borrowing-limit/2011/04/28/AF5KvY8E_story.html

    Yes, polls show public support for raising taxes on high income individuals, but can anyone name 30 to 40 House Republicans and 10 to 15 Senate Rebulicans that are willing to vote for tax increases as part of a deficit deal? (Heck, can you name just five?) And if anyone believes that Obama will allow all of the Bush tax cuts to expire in 2013 (assuming he is re-elected) rather than allow the tax cuts for the wealthy to remain in place, well, I have a bridge in Brooklyn you might be interested in buying.

  10. Will  ::  3:57 pm on April 29th, 2011:

    You need to add the word marginal to the discussion. Is it really so awful that someone earning a BILLION dollars would pay 49% marginal rate. My god, they might starve. Get a grip.

  11. Steve Roth  ::  9:33 am on April 30th, 2011:

    > The problem with these very high tax rates, of course, is that the wealthy will find ways to avoid them.

    The problem with severe penalties for murder is that people will find ways to avoid them.

    If that is “the” only problem with them, there’s really not a problem — except that the enforcement arms have been eviscerated by the starve the beast crowd.

  12. Some Guy  ::  2:58 pm on April 30th, 2011:

    Ummm… Taxvox is one of my favorite sites and I love your work. Still, there’s almost zero substantive critique of the plan here. I’m no great fan of the people’s plan; however, arguments as to why it’s flawed or implausible are mostly lacking in this post. A paragraph by paragraph breakdown of this post:

    1. Intro.
    2. Intro.
    3. Description of Plan.
    4. Description of Plan with substance-free editorializing, “The progressives create impossibly high tax rates” and unsupported assertions, “they almost certainly won’t [balance budgets] after [2021].”
    5 & 6. Description
    7. Substance-free Editorializing. “breathtaking”
    8. Description.
    9. Argument: People cheat on their taxes.
    10. Substance free editiorializing: Disappointment that the plan did not reflect author’s own policy preferences.
    11 & 12. Throwaway paragraphs.

    I know the arguments… high marginal tax rates existed for so long due to the existence of tax avoidance strategies to keep down effective tax rates. Refundable credits on housing interest deductions get rid of the upside down subsidy. Etc. Still, those things need to be spelled out for this post to be anything other than substance free or a sermon to the choir.

    And what arguments you do make never quite refute the premise of the plan. Does the plan fail to balance the budget long term because rich people will minimize their tax bills? Or is it the macroeconomic effects that are troubling?

    As an aside, doesn’t the idea of capping deductions at 28% allow us to keep tax preferences in the code? It depends on how the cap would be structured… but isn’t a lot of the cost of tax preferences a result of middle class and above itemizers? If that’s correct, I think this sort of cap might be the most politically feasible way to begin slaying the tax preference beast.

  13. AMTbuff  ::  11:03 am on May 1st, 2011:

    It fails to balance in the long run because spending on health care will continue to grow faster than revenue from GDP. The nation cannot afford “free” health care because it’s structurally defective. Families need a financial incentive that works on a procedure by procedure basis. Otherwise usage grows without limit.

  14. Michael Bindner  ::  12:50 pm on May 3rd, 2011:

    People mostly paid under Clinton. Indeed, the revenue numbers bear that out.

  15. SteveinCH  ::  2:30 pm on May 5th, 2011:

    When 90 percent of the Dem caucus votes for it, we’ll talk.