Wednesday, January 10, 2007

Mixed Messages from Speaker Pelosi

Despite Ways and Means Committee Chairman Rangel’s promise that repealing the Bush tax cuts is not going to happen on his watch (noted in my prior post), Speaker Pelosi seems more open to the idea. A story in yesterday’s BNA Daily Tax Report included comments by Pelosi on raising taxes for folks earning more than $500,000. Pelosi is quoted as saying those tax increases “are not off the table.” Not only is it not off the table, but it is apparently going to be taken into account in relation to financing important initiatives. As Speaker Pelosi is quoted, this tax increase may be “more important to the American people than ignoring the educational and health needs of America's children."

This matter of increasing taxes only on certain segments of society presents some real political dangers. First of all, the high-income group chosen here – those earning $500K or more per year, is a very small segment of the population. Based on the Statistics of Income data for 2002, the $500K and up segment comprised about .38% of all returns filed (about 505 thousand/130 million). They reported AGI of 683 billion, which is about 11 percent of AGI totaling over $6 trillion. Reflecting the steeply progressive nature of our system, this group paid over 24 percent of total taxes, amounting to $198 billion of the nearly $800 billion collected. (That $198 billion would amount to an approximate average tax rate of roughly 30 percent.)

Using these figures to approximate future tax collections, it does not seem that tax hikes can be limited to this group. A five percentage point increase would amount to only $30 billion – which is not much on a nearly $3 trillion budget. In fact. That tells me that if you want to raise taxes on the “rich” and really raise money, you have to go deeper in the roster than the $500K and up group. That means that those folks who are now targeted for AMT relief had better be prepared for some higher regular income tax payments. Relief may be illusory.

There are profound moral and philosophical problems with an approach that segments society for purposes of extracting the means to pay for government. Though the ability to pay is an important consideration, the politics of picking the pockets of a rich few does not present an attractive vision of democracy in action. Moreover, to the extent that there are “educational and health needs of America’s children” (in Speaker Pelosi’s words) should that not be a commitment of all Americans? In other words, if you think it is that important, why not have everyone pay more? Instead of sharing burdens, it is far too easy to target others to bear them for you.

The answer, I suppose, lies in assumptions about the marginal utility of those dollars in the hands of the persons earning them. But those assumptions are dubious, at best – and the subject of a later post.


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