Raising Taxes on the Rich

By :: April 12th, 2012

This afternoon, I moderated an interesting Tax Policy Center panel on taxing the rich. With the Senate about to debate a Buffett tax on millionaires, the timing couldn’t be better. Unfortunately for the White House, about the only thing the panelists agreed upon was that the Buffett tax is a terrible idea.  

My fellow panelists were Doug  Holtz-Eakin, president of the American Action Forum and former advisor to President Bush and the McCain for president campaign; David A. Levine, former chief economist at the Wall Street firm of Sanford C. Bernstein & Co. and a supporter of  Responsible Wealth, a group of millionaires who believe high-income Americans can and should pay more taxes;  Donald Marron, my boss at TPC and a former acting director of the Congressional Budget Office; and Diane Lim Rogers, chief economist at Concord Coalition.

The group agreed that some new tax revenues will be needed as part of a prudent fiscal plan and mostly agreed that broad-based tax reform should be a sensible part of such an initiative. But there were no fans of the Buffett rule.   

After that, we disagreed about as much as everyone else in Washington (though far more respectfully).

The panel couldn’t even agree about what rich means. Is it $1 million-a-year in income? Is it $200,000, a definition proposed—in quite different contexts-- by both President Obama and Mitt Romney? Is it those in the top 1% of income, who make more than $500,000 and an average of about $1.5 million? Take your choice.

Donald made the important point that all rich people are not alike. The problem--if you think it is a problem--of rich people paying less tax than their secretaries is largely limited to those with lots of tax preferences or wealthy investors who pay much of their tax at the low 15 percent rate on capital gains and dividends.

People who are paid salaries—even big ones (think professional athletes or  doctors) tend to pay effective rates pretty close to the 30 percent minimum rate the White House wants.     

Whoever the rich are, Doug thought the whole concept of special taxes aimed at one income group is silly. There is nothing wrong with a progressive tax system, he said. But when you consider who benefits most from spending, government as a whole is quite progressive already.

The other panelists disagreed, though by varying degrees. David took the most aggressive position: The low taxes paid by high-income households are nothing less than shameful, he argued.

How would they reform the tax code? Diane would reduce or restructure credits, deductions and exclusions. To help reduce the deficit she’d reluctantly raise rates on high income households as well. Doug called for replacing the current revenue system with a broad-based consumption tax—an idea many economists love but which turns out to be very hard to do.

David had a very different perspective. Bucking the conventional wisdom of nearly all economists, he called for significantly higher rates for top-bracket taxpayers while preserving most current tax subsidies. For instance, he’d keep the current generous tax treatment of owner-occupied housing and charitable giving.

About that Buffett tax: We pretty much agreed that imposing a minimum tax of any kind is an admission of policy failure. If the president thinks the rich don’t pay enough, he ought to restructure the tax code so they do, not stick on yet another Band-Aid.

See, people in Washington can cross ideological lines.

7Comments

  1. Tax Roundup, 4/13/2012 « Roth & Company, P.C  ::  8:12 am on April 13th, 2012:

    […] The science is settled: “…about the only thing the panelists agreed upon was that the Buffett tax is a terrible … (TaxVox) […]

  2. Michael Bindner  ::  8:40 am on April 13th, 2012:

    The reality is still that Obama could let the Bush Tax Cuts run out and will only extend them because of the weak economy. Still, he holds enough power in this debate that the GOP is most likely to blink first once their donors feel the pressure – especially if Mitt keeps dragging in the polls. If it looks like the Democrats will gain electorally, the GOP is foolish if they don’t make a deal now. A consumption tax is certainly a good idea to replace tax filing for most people, but only if supplemented by an income surtax like Michael Graetz and I both have proposed. (My proposal was in 2005 to the Bush Tax Reform panel if you need a paper trail). The question is not who the rich are, its who has a high enough income to still pay income taxes after the transition to a mixed system. Finally, the cause for the Buffett rule is not just the low rates on dividends and capital gains – but the cap on payroll taxes at $108,000 or so. Elimiate the cap, at least on the employer contribution side, and you need no Buffett rule. I propose doing just that by shifting from a payroll tax to an employer-paid consumption tax (or a VAT if personal retirement accounts are off the table).

  3. Walter L  ::  11:14 pm on April 13th, 2012:

    In my opinion, a complete overhaul of the federal individual income tax is needed. I think most people, around this time of year, are reminded how much of a needless hassle their tax returns are to complete. We need a simple tax structure that reduces compliance costs and tax evasion. Here’s the sort of tax structure I’d like to see:

    *For the lowest-earning 90% of Americans, say, those with an adjusted gross income of $113,000 or less, they would not pay federal income tax at all. Rather, a federal Value Added Tax would replace the level of income tax revenue generated by these Americans. This would be a 10% VAT that exempted housing, health care, education, groceries and interest. For needy families who needed the Child Tax Credit or Earned Income Tax Credit, they would be put in one’s paycheck as a payroll offset, or deposited to their bank accounts directly every pay period via ACH.

    *For high earners, that part of their income which exceeded $113,000 would be taxed at a flat 23% rate on all income. There would be no exemptions, deductions, or credits. As with California’s ReadyReturn system, the IRS would send out pre-filled tax returns to those subject to income tax, using tax information that has been reported to the IRS already. You review your return, make any necessary changes, and file it. A person earning $130,000 would pay income tax on $17,000 of income, for a total of $3,910.

    This would dramatically simplify everyone’s taxpaying experience, and free up IRS resources to go after tax evaders. Having a 23% flat rate on all high income would also reduce economic distortions, so that you would have fewer people choosing one sort of income over the other because it’s tax-advantaged. And it’s progressive, because it exempts most necessities, preserves the CTC and EITC, and would result in Mitt Romney paying nearly twice what he pays now.

  4. estate evaluation  ::  7:59 am on April 15th, 2012:

    Could they have just computed for the minority to determine ‘who are rich’? Surely that’s a fairer basis.

  5. Not all that wealthy  ::  8:06 pm on April 16th, 2012:

    Obama’s “Buffett Rule” tax plan is a complete scam: he has no intention of introducing legislation addressing it and is extremely vague as to how it would work. For example, how would charitable donations be handled (which Obama used himself)? How would tax-free municipals be treated?
    What this is all about is pure and simple: it is class warfare intended to paint Republicans as greedy and out of touch.
    The bottom line is the “Buffett Rule” would reduce the Deficit by, are you ready?, a grand total of – drum roll please – ZERO POINT THREE PERCENT!!! Boy, will that ever solve our spending problems!

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