In an attempt to avoid the impending “fiscal cliff,” House Republicans offered a debt-reducation plan Monday that would increase revenues by $800 billion over the course of ten years while refusing higher taxes for the wealthy. But one conservative think tanker says forget the wealthy: Raise taxes on the middle class — an argument most conservatives won’t want to hear coming from their side of the aisle.
Writing at the American Enterprise Institute’s magazine, The American, AEI scholar Sita Nataraj Slavov says that raising taxes on anybody might be bad politics, but “from a tax policy perspective, raising taxes on the middle class is a terrific idea.”
Slavov argues that protecting 95 percent of the population from higher taxes, while relying on higher taxes for the very rich won’t solve the “fiscal cliff” problem.
But how should it be done? A base-broadening that includes higher taxes for 95 percent of Americans who fall under the $200,000 household threshold.
Perhaps the biggest problem with the current tax code is that the base — that is, the kinds of activities that are taxed — is too narrow, requiring higher marginal tax rates than would otherwise be needed. What is excluded from the base? Many things — but among the largest items are interest payments on mortgages and premiums on employer-provided health insurance. Of course, there’s nothing wrong with people buying houses or employers offering health insurance coverage. But since these activities are taxed preferentially, there is more owner-occupied housing and employer-provided health insurance than there would be otherwise. In other words, these tax breaks — which are effectively government subsidies in disguise — distort people’s decisions. Curbing them would not only raise revenue, it would also encourage Americans to make decisions based on actual economic costs and benefits, rather than tax considerations.
Furthermore, many economists emphasize that taxing consumption is preferable to taxing income. Taxing income punishes saving, while taxing consumption does not. As an income tax is imposed on both wages and investment returns, those who save their paychecks end up owing more in taxes than those who spend them immediately. Discouraging saving in this manner can be particularly harmful to economic growth.
But serious base-broadening will require a net increase in the tax burden on the middle class, which benefits hugely from the biggest tax breaks. To avoid this outcome, some observers have suggested curbing tax breaks only for the rich. But that would excessively limit both the amount of revenue that can be raised and the potential improvement in economic incentives. Roughly 95 percent of American households make $200,000 or less. It is ridiculous to protect 95 percent of households from ever paying higher taxes, even as part of much-needed tax reform combined with fiscal belt-tightening.
Perhaps ironically, Slavov’s AEI colleague wrote a post with the headline, “Liberals keep saying they want to raise middle-class taxes. Perhaps we should start believing them.”