Practical Economics


Soaking the Rich? Obama Faces Uphill Fight

Art Pine

Americans' enthusiasm for class warfare doesn't run deep.



President Obama’s proposal to raise taxes on the wealthy may play well to his liberal Democratic base, but it is unlikely to win strong enough support among most voters to persuade Congress to pass it.

SEE ALSO: What Portion of the Tax Burden Do You Pay?

The president has proposed ending the Bush-era tax cuts for upper-income Americans and adding a new tax on those earning $1 million or more a year. Obama says these changes are needed to help reduce the budget deficit, but they are not likely to be enacted.

It’s not merely that the Republicans are dead-set against the tax increases, something they made clear within minutes of the proposals. Over the years, most Americans have been leery of soak-the-rich policies. Today’s stubborn recession and widening income gap may have changed that, but so far, any shift hasn’t become evident.

Several recent surveys have suggested that voters support raising taxes on the rich. Earlier this month, a USA Today/Gallup poll showed 66% of Americans favored targeting those earning $200,000 or more. And a CBS News/New York Times poll showed some 56% favoring similar legislation.

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But the poll figures often conceal the relative weakness of this support. Even when sizable numbers have said they favor targeting the rich, the issue hasn’t been a high enough priority to trump other topics about which voters are more concerned — such as war or medical benefits. The preference for higher taxes on the wealthy doesn’t reflect sentiment strong enough to lead to legislation.

Indeed, in recent years Americans have happily gone along with proposals to cut taxes for high-income groups. Ronald Reagan and George W. Bush pushed through measures that actually slashed upper-income tax burdens significantly, and they won plaudits for it. Today, only Democrats are active in pushing for those cuts to be repealed.

Congress’ most conspicuous move to tax the rich has backfired. The Alternative Minimum Tax, enacted in 1982 to prevent millionaires from using tax loopholes to avoid paying income taxes altogether, now crimps millions of middle-income Americans whose earnings have been pushed into higher brackets as a result of inflation.

According to conventional wisdom, the reason the politics of envy hasn’t caught on in the United States is the continuing lure of the American Dream. Even if income inequality has increased in recent decades, many Americans harbor hopes that someday they, too, may be well-off.

And under America’s progressive tax system, the rich do provide a hefty share of the government’s tax revenues. Census Bureau figures show Americans in the top 10% of the income scale pay more than 72% of all federal individual income taxes; those in the top 5% pay 61% of the total; and those in the top 1% pay almost 40%.

Obama’s assertion that millionaires are paying proportionally less in income taxes than their secretaries appears to hold true for relatively few. Statistics show that on average those earning more than a million dollars a year pay more than 23% of their income in federal taxes, while those earning $50,000 to $100,000 a year pay about 9%. (The rich earn much of their money from capital gains on investments, which are taxed at a 15% rate.)

Some 49% of American households pay no income taxes at all because their income is so low that they’re exempt (though not from payroll taxes). The nonpartisan Tax Policy Center predicts that for 2011, the figure will rise to 50.2%, partly as a result of the recession. Lower-income Americans also have gained from increases in government cash benefits.

Admittedly, upper-income taxpayers have received some significant tax relief over the past few decades. The tax rate for the highest tax bracket has fallen from a peak of 92% in 1952. It shifted to 77% in 1964, 50% in 1982, 28% in 1988 (after the Reagan tax cuts), 39.6% in 1993 and 35% in 2003 (after Bush’s reductions). It’s now 35%.

It’s true that America’s highly publicized income gap is widening: the earnings of upper-income Americans are rising much faster than those of ordinary workers these days. But that’s primarily the result of sharply rising executive pay, along with hefty income gains in the financial services industry.

None of these changes has led to a denigration of America’s historic progressive income tax system, however, and economists say Obama’s proposal to raise taxes on the rich wouldn’t reverse the widening income gap or skew the rate structure significantly. All it would do is raise revenue.

Moreover, the soak-the-rich plan has some downsides of its own. Even if lawmakers did raise income tax rates for the rich, they’d still need to enact more spending cuts to close the budget gap; the higher rates that Obama has proposed aren’t enough to close the deficit.

Finally, raising taxes on those earning $250,000 or more and enacting a new surtax on those making over $1 million might well discourage some investment, and the jobs that investment would generate. Enactment of the plan would also diminish prospects for a broader overhaul of the current tax system and the elimination of special tax breaks, which Republicans might support.



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