Higher Taxes for the Very Rich Would Help the GOP
Life + Money

Higher Taxes for the Very Rich Would Help the GOP

Andrew Rich/iStockphoto

George W. Bush may have tracked the 2008 elections, but it is his father who hovers over the 2012 campaign. Republicans are convinced – absolutely convinced – that George Herbert Walker Bush lost his reelection bid in 1992 because he had promised no new taxes, commanded “read my lips” as he made that vow, and then increased taxes anyway. Boom. He was out of a job.

This time is different. Other than celebrating the assassination of Osama bin Laden, President Obama has made it clear that his central 2012 campaign theme will be socking it to the rich. As he tours the country, the president hammers away on the need to make “millionaires and billionaires” pay their fair share of taxes – a proposal that most Americans endorse with enthusiasm. This presents Republicans with a problem, and an opportunity.

Consider the polling results. Between two-thirds and three quarters of voters think asking the wealthy to pay more in taxes is a dandy idea, and far preferable to cutting Social Security or Medicare. At the same time, 73 percent of Americans in a recent Gallup poll said our federal budget deficit is the result of excessive or wasteful government spending; only 22 percent saw inadequate taxes as the villain. More important to the upcoming election, 73 percent of independents blame excess spending for our fiscal woes, while only 20 percent of those highly sought-after voters think we’re not paying enough in taxes. This is meat and potatoes to the GOP, which has taken the lead in cutting spending.

However, in the same survey, most people think we should raise revenues and cut spending; far fewer consider a single approach the best way to balance our budget. Even among Republicans, a mere 30 percent see only spending cuts as the ideal way to balance the budget. Thus, the GOP’s hard line in the sand against any sort of tax hikes may not be necessary. It may also not be advisable.

If they act soon, Republican leaders could move our budget conversation forward, and steal the president’s most potent talking point, by agreeing to raise marginal tax rates on our highest earners. They could counter the “party of no” narrative and offer a compromise. At the same time, they could blunt charges that they caved into White House pressure by redefining who should bear an extra burden in this time of need. In effect, they could steal Obama’s sound bite. They also could make serious budget cuts a condition of this proposal.

Many Americans have challenged whether the seemingly arbitrary $200,000 and $250,000 income level for singles and couples – as chosen by President Obama -- appropriately defines “wealthy.”  Chances are that two-salary couples with children living in high-cost areas like New York and California don’t consider themselves wealthy; most are probably not millionaires or billionaires. They might consider a $500,000 cut-off more appropriate. Many would agree.

What impact would raising the benchmark to half a million dollars have on revenues? IRS data for 2008 is the most recent available. That year, some 3.4 million returns, individual and joint, (3.8 percent of the total) reported taxable income of $200,000 to $500,000. Total taxable income for this group was $788 billion, or 14 percent of the nation’s total. They paid $194 billion in income taxes or nearly 19 percent of the nation’s one trillion dollars in federal taxes.

The non-partisan Tax Foundation estimated that President Obama’s fiscal 2011 budget proposal, which would have eliminated the G.W. Bush-era tax cuts  would boost the taxes owed by a single person earning $250,000 by 5.5 percent, and an individual taking home $500,000 by 8.7 percent.  If we assume for argument’s sake that taxes rise 6.5 percent on the entire $200,000 to $500,000 group – the IRS would have collected an incremental $12.6 billion.

Now let’s look at those making over $500,000. In this category, there were some 893,503 Americans. Collectively they paid $343 billion in taxes. The Tax Foundation estimates that those making $1 million would have seen their tax bill jump nearly 11 percent under Obama’s plan; those earning $5 million would have been subjected to a 12.2 percent hike. Those earning more than $1 million paid $249 million in taxes in 2008; those earning between $500,000 and $1 million paid $94 million. If we collected an incremental 11 percent, for example, from all those earning more than $500,000, the IRS would rake in an incremental $38 billion.

Most observers assume that eliminating the $200,000 to $500,000 income category renders boosting tax rates on the wealthy nearly irrelevant; the numbers don’t bear that out.  While raising the income bar for just the highest marginal rates would reduce the overall revenue windfall, it is still would be beneficial to the federal income statement, preserving about three quarters of the larger goal.

Redefining “wealthy” makes sense also because the highest income Americans are least likely to borrow from spending, and thus slow the recovery, when they pay their taxes. A family of four making $250,000 that suddenly faces a jump in taxes is likely to cut back on spending; the very wealthy will probably not much alter their consumption plans.

In exchange for bending on taxes, Republicans would be in an excellent position to demand further serious reductions in government spending – a universally popular opportunity. Nearly all Americans think our federal apparatus could be more efficient. President Obama himself has waxed enthusiastic about stripping out overlapping programs and unnecessary activities. 

Though the more profound debate over Medicare and Medicaid – the prime cost issue going forward – will not be easy, at the least the GOP will come to the table having earned today’s most prized accolade. On taxes, they will now look like adults. The spotlight will turn to Democrats, who, on spending, still occupy the nursery.

Related Links:
The Price of Taxing the Rich (Wall Street Journal)
Tax the Rich! Okay, but Then What, Mr. President? (CNN Money)
Senate Republicans: The Wealthy Pay Enough Taxes (The Hill)