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

By Lori Montgomery
Washington Post Staff Writer
Wednesday, October 13, 2010; 10:53 PM

For months, President Obama has stressed the budgetary rewards of eliminating tax breaks for the wealthy. But many Democrats see a more fundamental reason to let the Bush-era tax cuts expire in January: narrowing the growing divide between the rich and everyone else.

When Congress returns to Washington next month, a solid core of Democratic lawmakers says it will urge party leaders to seize a rare opportunity to reverse three decades of rising income inequality by resisting any effort to extend the cuts for the richest 2 percent of households.

Obama and Democratic leaders want to let those cuts expire. But they are playing down the social-justice angle - fearful, said Democratic congressional aides, of fanning conservative allegations that Obama is a closet socialist looking to redistribute wealth.

"I find it ironic that we're nibbling around the edges on this issue," said Rep. Raul Grijalva (D-Ariz.), co-chairman of the House Progressive Caucus. "I talk about the deficit because it's the party line right now. But this is a disparity issue. It's about poverty. It's about fairness. And, as Democrats, we need to stand for those things."

Republicans, who want to extend the cuts for everyone, say the correct response to income inequality is not more taxes on the wealthy but greater opportunity for those at the bottom of the income scale. They accuse Democrats of waging "class warfare" in a bid to cling to power in the Nov. 2 congressional elections.

"The administration believes that we ought to pit one group of people - those who have less - against those who have more and vilify those who have been successful. That's not what America means to me," said Rep. Eric Cantor (Va.), the second-ranking House Republican. "All of us want to make sure that the benefits of society flow to everyone and not to a selective few. I just disagree that it's government's job to confiscate the wealth of some and redistribute it to others."

With the recovery flagging and some influential economists urging lawmakers not to raise anyone's taxes, many analysts expect lawmakers to extend all the cuts, if only temporarily. One potential compromise: Democrats could offer a one-year extension of tax cuts for the rich in exchange for GOP support for additional measures to spur hiring, such as a payroll tax holiday or a package of business tax breaks that Obama recently proposed.

But Obama campaigned on a vow to repeal the cuts, and many Democrats say even one more year of lower taxes for the rich would amount to a betrayal.

"I just really believe it's an argument we can win," said Rep. Tim Ryan (D-Ohio). "If you look at our tax structure from World War II to 1980, we had a system where the wealthiest paid more, we kept reinvesting back into our country, and we had a strong middle class." Since then, the rich have raked in a growing share of the nation's income even as their tax rates have fallen. "It's just been this sucking sound up the ladder to the wealthiest Americans," he said.

Using the tax code to address income inequality has been a staple of Democratic politics at least since the Clinton presidency, and the idea has been endorsed by some of Obama's top economic advisers.

In a 2008 speech just before he was named director of the National Economic Council, Lawrence H. Summers said rising income inequality presented "a critical problem of legitimacy" for U.S. capitalism.

A year earlier, Summers and Jason Furman, now his deputy, argued in a Hamilton Project paper that raising taxes on the rich - "progressive taxation" - is the "preferred path" to "offset some, but not all, of the increase in inequality."

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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