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Rich People Rule, Chait Drools!

The Tax Policy Center's Rachel Johnson looks at how much you'd have to jack up tax rates on the rich in order to meet President Obama's deficit-reduction goals:

If Washington is going to need new tax revenues to bring the deficit under control—which it inevitably will– I increasingly wonder where the cash is going to come from. If you listen to what President Obama has been saying in recent days, it appears that while corporations and nearly all individuals and families would avoid any tax hit at all, a handful of high-income households would get socked with major increases.
These tax hikes would be so big, in fact, that top-bracket taxpayers might end up paying a rate of 67 percent on ordinary income and nearly 50 percent on capital gains.  

TPC colleague Howard Gleckman notes that it will never happen. Andrew Sullivan comments, "Really? Go read Chait. He's almost drooling at the prospect."

Well. Let me make a few points in response. First, I enjoy the assumption that we can infer from my drooling over a policy proposal that the proposal has a strong chance of succeeding. Sadly, that assumption is not born out by the history of my career as a journalist.

Second, Andrew does not provide any link to me drooling at, or even advocating in a non-drooling way, the prospect of closing the fiscal gap via a large tax cut on the rich. That is because no such link exists. Indeed, the plan I keep pimping on this blog involves letting the Bush tax cuts expire across the board. (I favor this largely on pragmatic grounds -- it requires no legislative action at all.) That is very different than raising the revenue entirely on the rich.

Third, raising the needed revenue entirely from the rich would, in fact, be a lot easier than Johnson's numbers suggest. She simply calculates the revenue from raising income tax rates. But of course, there are other (more efficient) ways to do it. The Bowles-Simpson commission proposed eliminating all the tax loopholes, but then poured nearly all the revenue back into lowering tax rates down to a low, low top rate of 25%. If you closed the loopholes and simply kept all the revenue, you could keep nominal tax rates not much higher than they stand rate now.

John son says this plan would require the richest Americans to pay another 7% of their income in taxes. Is that a lot? Yes. Is it Soviet Russia? No. It would merely return the effective tax rate to about where it stood during most of the postwar years:

Remember, the pain of bearing that tax hike would be offset by the vast increase in wealth enjoyed by the rich over the last three decades.

I'm not drooling over this prospect -- it would be sad that millions of Americans would enjoy less comfortable lives. But contrast the pain involved here with the pain we're contemplating in every other area of the budget. Even Obama's proposal -- the one that doesn't go nearly far enough -- entails shouldering college students with larger tuition debt and making more poor people shiver through the winter. Despite the fantasies of cutting the deficit by painlessly trimming Warren Buffett's Social Security check, there isn't much money there, because the tiny share of rich people don't consume a vastly disproportionate amount of public retirement benefits. They do consume a vastly disproportionate share of income. When you compare the kinds of real hardship involved in a fiscal adjustment, returning the effective tax rate to postwar rates seems relatively mild.

Now, will this happen? No, it won't. The rich have far too much political influence to let it happen. You don't have to be a Marxist to wonder why plans to cut the deficit by cutting benefits for Social Security recipients, which average all of $14,124 a year, is tough-minded fiscal hawkery, while plans to cut the deficit by raising taxes on the rich are irresponsible left-wing big government. I'm a political realist, and I understand that if you need to cut the medium term deficit -- and we do -- you need to accept political realities, which include the massively disproportionate political influence of the rich. But let's be clear about what's actually happening here.