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Put the millionaires' tax money to good use

By Steven Pearlstein
Washington Post Staff Writer
Thursday, September 2, 2010; 8:16 PM

With the economy downshifting into first gear and their poll numbers sagging, the White House and Democratic congressional leaders are desperate for an economic and political game-changer as they head into the November elections. As it happens, there's one close at hand: the expiration of the "Bush" tax cuts at the end of the year.

In this instance, the politics of obstructionism appear to work in the Democrats' favor. If Republicans follow through on their threat to use Senate rules to block a vote on President Obama's proposal to extend tax cuts for households with incomes below $250,000, then the Bush tax cuts will automatically expire for everyone. At that point, Republicans will have a heap of explaining to do - not only about raising taxes and sacrificing the interests of the middle class to those of the rich but also about forgoing $700 billion in revenue over the next decade that could be used for deficit reduction. That, in a nutshell, is the Democratic strategy.

The only problem with that strategy is that there are some Democratic wusses who are so scared about the prospect of losing their seats by voting for a tax increase on the rich that they are pushing the White House and congressional leaders to put off the issue until after the election, during the expected lame-duck session. Otherwise, they warn, they may be forced to vote with Republicans for a tax-cut extension for everyone. That would put President Obama in the uncomfortable position of either vetoing the bill and triggering an automatic tax increase, or letting it become law and accepting a humiliating political defeat. That is what passes for the Republican strategy.

The economics here are pretty straightforward.

Given the fragile state of the economy, this is no time to be raising taxes on the middle class, as nearly every dollar taxed is nearly a dollar not spent buying goods and services. There is a good debate to be had over whether, over the longer term, some sort of tax hike on the middle class will be needed to bring the federal budget closer to balance. But with unemployment still hovering around 10 percent, it is too early to change the focus from debt-financed fiscal stimulus to deficit reduction.

At the same time, even conservative economists acknowledge that while the rich account for a disproportionate share of consumer spending, raising their taxes by a modest amount won't alter that spending or have much of a short-term impact on the economy. The reason: Wealthy people make considerably more than they spend, and they save the rest.

We can argue about where middle class ends and rich begins, but there is nothing magic about $250,000. Indeed, there are hints that, to mollify the waverers, the White House may be willing to temporarily extends tax cuts on incomes up to $1 million. That would still raise 85 percent of the additional revenue that would come from reinstating the 39.5 percent tax bracket, while limiting the impact of the tax increase to the top 0.2 percent of households by income.

Republicans like to justify their opposition to taxes on the rich by claiming it's really job-creating small businesses they are protecting, since the profits of many small businesses are taxed at personal rates. This is simply hogwash, as a recent analysis by the Congressional Budget Office concluded. For starters, the job-creating prowess of small business is largely a political myth - particularly so in the recent downturn in which small businesses have accounted for a disproportionate share of the job losses. More significantly, any firm that has taxable profits of $1 million is unlikely to be a struggling small business so starved for cash that a modest increase in tax rates would prevent or discourage it from hiring a profit-producing new employee.

Raising taxes on the rich, of course, would not by itself do much to address general uneasiness about the economy. Which is why it would be good economics as well as good politics if, over the next three years, the revenue from this tax increase were used to give another needed boost to the ailing economy - not by returning to excessive public or private consumption but by laying the foundation for future growth.

For several decades, policymakers have tossed around the idea of an National Infrastructure Bank to provide loans and matching grants for highway and transit projects, a new air traffic control system, high-speed rail, clean-energy generation and smart electric grids, and an expansion of state college and university systems. Over the years, this idea has won bipartisan support from business groups, labor unions, governors and big-city mayors. And with interest rates at record lows, construction costs down 25 percent and so many construction workers unemployed, there is no better time to launch such an effort.

With an independent board, a professional staff and its own sources of operating funds, the Infrastructure Bank could be insulated, as much as possible, from political influence and the pork-laden congressional appropriation process. And by devoting the first three years of revenue from the "millionaires" tax increase, it could be capitalized initially at $100 billion, enough to leverage investments of two or three times that amount over the coming decade.

This ought to be a no-brainer. Given the economic challenges we face and the anxiety we all feel, if Democrats can't make a convincing case for raising taxes on 315,000 millionaires and using the money to rebuild the country's aging infrastructure, then maybe they don't deserve to be reelected.

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