In 2011 the Bush tax cuts will expire, and President Obama plans to also close various loopholes. As Peter Orszag, Obama’s budget director, delicately says of the rich, “We are asking them to pitch in a bit more.” The current moment has the feel of an inflection point for the American wealthy, like the stock-market crash of 1929 or the election of Ronald Reagan in 1980.
But inflection points can be misleading. Even on the rare occasions when they occur, they often bring about less change than at first it seems. The mere fact of change is so startling that the magnitude of that change can become exaggerated. So it is with Obama’s approach to the wealthy, especially on taxes. His agenda is a bold one in many ways. Yet his tax code would still look more kindly on wealth than Nixon’s, Kennedy’s, Eisenhower’s or that of any other president from F.D.R. to Carter. And only part of the reason for this is widely understood.
It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.
What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.
Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.
No one in the Obama administration or Congress has suggested taking rates back to their sky-high pre-Reagan levels. But a tax code that drew a sharper distinction between the upper middle class and the extremely wealthy, while keeping its top rate below, say, 50 percent, seems more conceivable.
The argument against such increases is not insignificant. Conservative economists say that higher tax rates could damage the economy and ultimately be self-defeating, because they would give the rich an incentive to shift their pay into stock or other investments that are taxed less. And to some degree, such shifting would surely happen.
But one economic lesson of the last couple of decades is that these responses are fairly modest. An academic study of the Clinton tax increases found that they caused corporate executives to exercise some stock options earlier than they otherwise would have. But the increases had no noticeable long-term effect. The executives didn’t ask to be paid entirely in stock, and the economy boomed. Increasing taxes on the rich, in other words, has some unintended consequences, but it mainly has the intended ones: it raises revenue and reduces inequality.
For 30 years, the debate over taxes has been shaped by a faith that a flatter code is always better. There is little reason to believe that and every reason to believe that tax brackets, as well as tax rates, should be part of the coming debate.
Here's what you're paying for (no real point here, just thought it worth posting):
oh, and pirate killing snipers!
There is a parable at the end of the Sermon on the Mount that tells the story of two men. The first built his house on a pile of sand, and it was destroyed as soon as the storm hit. But the second is known as the wise man, for when "...the rain descended, and the floods came, and the winds blew, and beat upon that house...it fell not: for it was founded upon a rock."
We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity – a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad.It's a foundation built upon five pillars that will grow our economy and make this new century another American century: new rules for Wall Street that will reward drive and innovation; new investments in education that will make our workforce more skilled and competitive; new investments in renewable energy and technology that will create new jobs and industries; new investments in health care that will cut costs for families and businesses; and new savings in our federal budget that will bring down the debt for future generations. That is the new foundation we must build. That must be our future – and my Administration's policies are designed to achieve that future.
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