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Experts Discuss Obama's Proposed Tax Increases

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Sunday, March 8, 2009

The Post asked economists, former officials and others to weigh in on President Obama's proposed tax increases.

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JIM CRAMER

Chairman of TheStreet.com; host of CNBC's "Mad Money"

As someone who can expect a real shock when I get an Obama-shredded paycheck the moment his plus-$250,000 tax levy kicks in, I can't be thrilled. Only the brain-dead like to take a pay cut for doing the same job. I probably won't get paid for my work until July, with my current salary going to fund an immense expansion of the federal budget ordered by the man I voted for.

I was recently informed by Rush Limbaugh that I am on the president's "enemies list" for speaking out against what I consider to be the most wealth-destroying budget in history. But I genuinely wouldn't mind the increase if the country weren't staring the second Great Depression in the face. I have supported the vast majority of Obama's initiatives. Back when I donated to candidates, I supported those who favored higher taxes for those who make the most money because we can most afford it.

But for heaven's sake, not now! This is the moment when the president needed to tell us, "America, I have an agenda that I wanted badly to put through, but not here, not now, when tax increases might send us over a cliff of fear and dread. We need everyone, especially the wealthy, to start companies, put people to work and get this economy back on track.

"Then we'll deal with paying for it when the economy's thriving again and more people are joining the workforce than leaving it."

Right agenda; wrong time. Give it up, Obama, before unhappy days, like 1932, are here again. Get people back to work and you'll have all the power you need to enact your agenda and then some!

ROBERT D. REISCHAUER

President of the Urban Institute; former director of the Congressional Budget Office

Is "afflicting the comfortable," as John Kenneth Galbraith liked to quip, fair, economically sensible and practical? In this case, yes! Unlike average Americans, those on the income ladder's top rungs have enjoyed very healthy income gains over the past decade. And, even more than those lower down, they have profited handsomely from lowered effective tax rates. To make the education, health and environmental investments that our society and economy need for the long run, why shouldn't those who have reaped most from society's past investments bear most of the burden of seeding tomorrow's opportunities?

Some fear that increased taxes on the top 5 percent will wreak economic havoc -- crimping entrepreneurial spirits and stanching charitable giving. But the overwhelming body of economic evidence suggests these effects are small.

True, seeking offsets by eliminating outdated and ineffective government programs would be preferable, but that's a slower, more politically difficult row to hoe. As the administration seeks more savings on the spending side to fully fund the president's priorities, returning tax rates on the fortunate to near those of the boom-time 1990s is a practical first step.

Over the longer run, as the nation grapples with its entitlement promises, educational needs and infrastructure deficiencies, Americans at all income levels will have to accept somewhat higher levels of taxation.

N. GREGORY MANKIW

Economics professor at Harvard University; chairman of the President's Council of Economic Advisers from 2003 to 2005

The best data on the distribution of the tax burden come from the Congressional Budget Office. CBO data show that the tax code, including all federal taxes, is already highly progressive. In 2005, the most recent year for which numbers are available, a household in the bottom quintile paid 4.3 percent of its income in federal taxes and one in the second-lowest quintile paid 9.9 percent. A household in the top 1 percent of income distribution paid 31.2 percent of its income in taxes.

The tax rate that top income earners face is not historically anomalous. It was higher during the Clinton years but lower during the Reagan years. In contrast, the tax rates now faced by the lowest four quintiles are unusual by historical standards. They were higher from 1979 (when the CBO data start) until the passage of the Bush tax cuts in 2001.

President Obama's proposal to raise taxes at the top to further cut taxes at the bottom has one rationale: using the coercive power of the state to "spread the wealth around." In addition to the obvious disincentive effects, the policy raises deep philosophical questions. If one citizen of a nation can lay claim to the wealth of his more productive neighbor, shouldn't poor nations have the right to lay claim to the resources of richer nations such as the United States?

DOUGLAS HOLTZ-EAKIN

Former director of the Congressional Budget Office; senior economic adviser to John McCain's presidential campaign

Barack Obama is sticking 5 percent of Americans with the bill for his massive expansion of government. This is budgetarily risky because the expansion -- ushered in under the guise of "stimulus" -- has already taken place. Congress will undoubtedly keep the increased spending, but if it fails to enact the higher taxes Obama proposes, the deficit will remain close to a trillion dollars for the foreseeable future.

It's also bad economics. The antiquated U.S. tax code has driven an increasing number of businesses -- especially small, dynamic start-up ventures -- to file their taxes as "individuals." Nearly half of Americans work in businesses with fewer than 50 employees, and there should be a premium on keeping those jobs and creating more. The administration will argue that a minuscule number of businesses is affected, but most of total business income will get hit. Jobs are where the money is, and jacking up taxes on jobs endangers the recovery Americans need so much.

Insulating 95 percent of voters from the consequences of their electoral decisions is dangerous and misleading. Does anyone really believe that we can expand nondefense spending to a record share of gross domestic product, reform the health-care system that amounts to one-sixth of the economy, reinvent the energy portfolio that powers our lives, and drive next-generation broadband to every home while cutting taxes for 95 percent of Americans?

This is a misguided policy toward fairness. Rising inequality is a 30-year process with its roots in skills and education -- not tax policy -- and creating punitively high top tax rates to fund checks for low-earners does not address the underlying issues.

DIANE LIM ROGERS

Chief economist of the Concord Coalition; blogger at EconomistMom.com; former senior economist for President Clinton's Council of Economic Advisers

President Obama's tax proposal is motivated by understandable fairness concerns. Income inequality was exacerbated by the Bush tax cuts, which went disproportionately to the rich. But raising taxes the way the administration has outlined is probably too limiting (and explains why the Obama budget proposal reduces the deficit only over time and not relative to current law, under which all of the Bush tax cuts expire).

In economic terms, a return to Clinton-era marginal tax rates on upper-income households by 2011 (by which time we hope the recession will have ended) is a very reasonable policy. That does not mean, however, that it will be sufficient to meet current costs -- much less the higher spending Obama proposes -- or optimal. Raising taxes only on those making more than $250,000 a year may not provide enough of a revenue base. There are also better ways to raise taxes on the rich, such as reducing tax preferences that go mostly to the wealthy; this would allow revenue to grow without having to increase tax rates and their disincentive effects.

Politically, there's a danger in framing the debate over Obama tax policy as one over the "Bush tax cuts." This will promote the same partisan head-butting and reluctance to cooperate on hard choices that have plagued this town for eight years. It is time for a bigger change in tax policy, too.

DAVID BONIOR

Chair of American Rights at Work; former House Democratic whip; manager of John Edwards's 2008 presidential campaign

There is an old story where Bud Abbott says to Lou Costello, "If you have 50 bucks in one pocket and $100 in the other pocket, what do you have?" Costello says, "Somebody else's pants."

The middle class ought to be the beneficiaries of the wealth they help produce. It's that simple. Our president and the American people understand that it's time to restore the bottom-up economic growth that will revive our economy and instill the sense of fairness that the people are hungry for -- that's what this past election was all about. In fact, 52 percent of those who make more than $250,000 voted for Obama knowing that their taxes would and must go up to help fix our broken economy.

The tax system of the past eight years has promoted a greed-driven environment fueled by those at the very top of the income ladder. The Economic Policy Institute has found that from 1989 to 2006, more than 90 percent of all income growth went to the top 10 percent; 59 percent of that growth to the top 1 percent; and 35 percent to the top one-tenth of 1 percent. Providing tax benefits to the wealthiest has undermined a sense of fairness in not only the tax structure but our economy in general. It's time for a major restructuring of our economy not just to rebuild but to end the disgraceful war on the middle class.

LAURA D. TYSON

Professor at the University of California at Berkeley's Haas School of Business; chair of the National Economic Council in the Clinton administration; member of President Obama's Economic Recovery Advisory Board

It is a shibboleth among critics that President Obama's budget relies almost exclusively on tax increases on the wealthy to fund increases in government spending, yet this not an accurate representation of the facts.

The Obama budget is honest: It includes the costs of military operations in Iraq and a permanent fix for the alternative minimum tax. Instead of a five-year plan, it presents a 10-year plan to show the rising costs of Medicare and Social Security as the baby boom generation begins moving into retirement. It does not use gimmicks such as "sunsets" for tax cuts or spending programs. It addresses the government's yawning revenue gap -- a result of the tax cuts and spending increases of the past eight years -- through both spending decreases and higher revenues. It reduces non-defense discretionary spending to 3.6 percent of GDP, compared with an average of 3.8 percent between 1969 and 2008. But even with significant spending restraint and greater efficiencies in existing government programs like defense procurement, higher taxes are still required to reduce the deficit. Obama proposes allowing the 2001 and 2003 tax cuts for the top 3 percent of taxpayers -- families with incomes over $250,000 and individuals with incomes over $200,000 -- to expire, restoring rates on income, dividends and capital gains to levels that supported strong economic growth in the 1990s. These rate increases would reduce the deficit by about $750 billion over the next decade.

The budget is honest in that it also shows how Obama would pay for his initiatives in health care and the environment. Limiting the tax rate at which the top 3 percent of taxpayers can take itemized deductions to 28 percent, the top rate for such deductions under President Reagan, would provide half of the $630 billion reserve for health-care reform, with the other half coming from savings in Medicare and Medicaid. And revenue from auctioning off permits for carbon emissions under a cap-and-trade system would finance tax cuts for 95 percent of American families and $15 billion a year for investments in energy efficiency and clean technologies.


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