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In push to let Bush tax cuts expire, Democrats to focus on narrowing income gap

From foreclosure to food shortages, the economic downturn set in motion by the financial crisis of 2008 is having a broad and deeply-felt global impact.

By their calculations, letting George W. Bush's tax cuts expire for married couples making more than $200,000 a year "would offset roughly one-sixth of the entire increase in inequality since 1979."

'Bang for the buck'

Today, with the economy struggling and the national debt rising, Summers said in an interview that there are better reasons to let the upper-income cuts expire, such as "maximizing job growth in the short run and keeping the country solvent in the long run." Ending the cuts would bring in an extra $700 billion over the next decade.

"Bang for the buck is most important. Whatever capacity there is for running deficits, this is a bad use of what is clearly scarce fiscal space," Summers said, reeling off a list of preferable uses for the money, including investing in job-creating infrastructure projects and expanding tax incentives for businesses that hire new workers.

Summers, who will step down and return to Harvard in January, agreed that tackling income inequality is also a factor. But "this isn't about redistribution," he said.

"The administration isn't looking to increase redistribution in our society, but it doesn't think this is the time to erode traditional progressivity in the tax code, either," Summers said. "I think we had the rates at the top end right in the 1990s . . . and I don't see any reason they should not return to where they were."

Redistributing wealth is a primary function of the U.S. tax code. Until the early 1960s, the top income tax rate hovered around 90 percent. It has since fallen fairly steadily, dipping to a low of 28 percent during the Reagan administration.

Soaring deficits prompted presidents George H.W. Bush and Bill Clinton to reverse the trend, pushing the top rate to 39.6 percent. But in 2001, George W. Bush pushed it back down to its current level of 35 percent.

Virtually every taxpayer benefited from the Bush tax cuts, including those in the bottom brackets, who saw the levy on their first $6,000 of income fall from 15 percent to 10 percent. But the biggest cuts flowed to the wealthiest taxpayers, who benefited disproportionately from lower taxes on capital gains, dividends and inherited wealth, as well as earned income.

This year, the nonprofit Tax Policy Center estimates that the cuts will add 2.5 percent - less than $1,000 - to after-tax incomes for middle-class Americans (those earning between $20,000 and $67,000). But the top 0.1 percent (those earning more than $2.9 million a year) will get to keep an additional 8.2 percent, or $500,000 on average.

Since the Reagan administration, falling tax rates have coincided with a dramatic rise in income inequality in which the share of national income earned by the top 1 percent of households had rocketed to 23.5 percent by 2007, according to research by economists Emmanuel Saez and Thomas Piketty. The recent recession tempered that trend: In 2008, the top 1 percent claimed 21 percent of national income. But Saez writes that the reduction is likely to be "temporary unless drastic regulation and tax policy changes . . . prevent income concentration from bouncing back."

Who pays (or doesn't)

Defenders of the Bush tax cuts note that the wealthy already pay a disproportionate share of total income taxes, with the top 1 percent shouldering 38 percent of the burden, according to a new analysis of 2008 data by the nonprofit Tax Foundation.

Meanwhile, a proliferation of tax breaks for the poor and middle class has left fully 48 percent of people in the United States, including children, living in households that pay no federal income tax, according to research by William Beach, director of the Heritage Foundation's Center for Data Analysis.

"We have this astounding and rapidly growing population that has no financial stake in the government and a smaller population that is completely on the hook for the cost of government," Beach said. "To me, that's a much, much deeper problem than whether or not the rich are getting a tax cut."

The hit to the rich by letting the cuts expire would also be bigger than Obama has suggested, said Alan Viard, an economist at the American Enterprise Institute. Viard noted that Clinton-era rates would be in effect for just two years. In 2013, the top rate would climb higher - to nearly 45 percent - when a new tax on investment income for high earners kicks in to help finance Obama's new health-care law.

Beach and others argue that such rates would retard investment and slow hiring at the worst possible time. Democrats disagree.

Indeed, Rep. Sander Levin (D-Mich.), chairman of the tax-writing House Ways and Means Committee, wants to go further in taxing the wealthy, by treating their dividends - a large chunk of earnings in top households - as regular income. Dividends are taxed at 15 percent; Obama wants to cap the rate at 20 percent.

"It has to be really proven to be necessary for both fairness and growth," Levin said of the cap. "At this point, I'm not convinced."

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