In 1980, when Reagan was elected, every dollar you earned past $215,400 was taxed at a rate of 50% (70% for unearned income). After the tax revolt of the 80s, that rate was drastically reduced: to 28% at its lowest point. In the Clinton years that rose back up to 39.6% for dollars earned past $250,000 or so.
Under George W. Bush, that rate was reduced to 35%, where it remains through today. Under Obama, the top rate would move back up to where it was under Clinton: about 40%.*
From the way that Republicans have been pounding their fists and shouting to the rafters, you would think that Obama was proposing a top income tax rate increase of epic proportions. In reality, he is proposing an increase of 5%. That's right: a difference of a nickel of every dollar earned after about $300,000. And the top rate would still remain low overall by historical standards--well under the >50% seen in most of the 20th century.
But what about capital gains (i.e., money earned from investments rather than a paycheck)? The current rate is the lowest it has been since 1933: 15%. Obama would raise that to somewhere in the neighborhood of 25%, which is about where it was in the Clinton years and somewhat higher than it was during much of the 80s. So let's put that increase at 10%.
The final tally, then: the top income tax rate increased by 5%, and the capital gains tax increased by 10%--both levels raised to what they were during the prosperous Clinton years.
The Republicans carry on as if the tax revolt of the 1980s never happened--as though the wealthiest Americans--the investors, the entrepreneurs--were still forfeiting over half of their post-$200,000 income to Uncle Sam. But they are fighting a battle that Reagan already won, and that the Democrats already conceded. There is not one serious politician left who advocates that we return to the pre-Reagan tax rates. And yet still, impossibly, bloody-mindedly, the Republicans insist on more tax cuts--despite dramatically increased federal spending (on both entitlements and two concurrent wars), and despite ballooning deficits. And they continue to depict Democrats as if they were advocating the absurdly high marginal rates of the Great Society years.
We cannot, as the backwards saying goes, have our cake and eat it too. To acknowledge the necessity for a modern infrastructure, a quality education system, a functional healthcare scheme, and a superior military is to acknowledge the necessity of a tax rate that is high enough to cover these tremendous costs. Perhaps there was a time when we could believe that the Republicans would offset their tax cuts with reductions in federal spending, but George W. Bush and his agenda of big government conservatism--and his pet war, Iraq--put that idea to rest.
I've noticed lately that I've been describing the Democrats as "adults" and Republicans as "children". No where is this more true than in fiscal policy. While the Republicans shout gleeful impossibilities in between schoolyard taunts--"Obama is a celebrity! I'll pay for $1000 billion worth of tax cuts by cutting $72 billion in earmarks!** Obama eats arugula!"--the Democrats reasonably suggest, as a starting point, that we return to a tax rate scheme that has been shown to work in the past. It is almost as if the Republicans themselves don't really believe that they'll be in power, and that all they have left is the grim catharsis of pretending to be Ronald Reagan in front of an audience of their peers.
*Hm..but is this quite right? According to one blogger, the de facto rate could be higher: "Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent." If true, this argues against my point--however, it is unclear from this post whether the additional nickel and diming would affect a large number of wealthy people or a relative few, or what. Also, it would be unfair to factor in these hidden costs of Obama's plan without also factoring them into the historical tax rates that form the baseline we are comparing against. So I think the most reasonable thing to do is ignore the de facto tax rates for now, and look naively at the explicit tax rates to give us a general idea of where Obama's plan stands historically.
**"Permanently extending the tax cuts would reduce tax revenue by $1 trillion over four years. If Mr. McCain eliminated every earmark (including money for the gas pipeline that Ms. Palin wants to build in Alaska), the savings would total about $18 billion a year. He hasn’t offered any idea of where he’ll get the rest of the money." (NYT editorial)
2 comments:
Got to take issue with a few of you statements..
"The final tally, then: the top income tax rate increased by 5%, and the capital gains tax increased by 10%--both levels raised to what they were during the prosperous Clinton years."
Regarding the "prosperous Clinton" years...
Mr. Clinton had the wind at his back when the Internet revolution took hold in the mid to late ninties.
Technology stocks ruled the day, and Yahoo, at one time, reached a high of 400 dollars per share.
He reaped the whirlwind in capital gains taxes, when the trading of tech stocks was all the rage. This is one of the reasons why he had a surplus.
Also, the administration's claim that "we created 22 million jobs" was actually spawned by the Internet revolution.
The technology industry created a boom for new jobs. I would venture to guess that Bill Gates created more jobs then Bill Clinton did.
Also, no consideration is given to the amount of jobs that were lost when the tech bubble burst.
Overall, "pols" get too much of the credit, or too much of the blame for the state of the economy. The Government, thank God, does not control free markets.
They can, however, stunt the growth of free markets with taxes and senseless regulation.
New taxes, no matter how slight the increase, will not help any country or state's citizens prosper in a slow growth economic period.
Just look at New Jersey, New York, and Michigan. Tell me how happy the people are with their tax burden? Is Detroit prospering today? Are Republicans running that state?
People may bash the Bush enconomy now, but these are recent rumblings considering we are in a slow down and the sub prime bubble burst.
I never heard word one, when unemployment was between 4.2 and 4.7 percent under a Bush economy. Lower then Clinton's best of 5.2. Now, at 6 percent, the sky is falling according to Democrats.
Considering the awful tragedy of 9/11 and the Iraq war, the economy is still viable, and growing, albeit at a slower rate.
Also, even though Fannie Mae, and Freddie Mac's sub-prime bubble has burst, the economy is still not in a full blow recession. Sorry, I don't see how higher taxes helps spur growth..
"We cannot, as the backwards saying goes, have our cake and eat it too. To acknowledge the necessity for a modern infrastructure, a quality education system, a functional healthcare scheme, and a superior military is to acknowledge the necessity of a tax rate that is high enough to cover these tremendous costs."
Well, since the Government throws away half of the cake we give them (they waste fifty cents of every dollar) why don't we ask them to show some fiscal restraint?
Both Congressional and Senate Republicans and Democrats did a geat job holding the purse strings.
Republicans where suppose to be the party of small government.
Yea right, President Bush did not find his veto pen until Democrats took over Congress.
Since their sweeping defeat in the congressional and Senate races, I hope that they have learned their lesson. I doubt it however. They are politicans afterall.
However, it seems that the Democrats will never learn theirs. They have never seen a entitlement program they don't like funding, or a tax they don't like raising.
You want modern infrastructure improvements? Consider the Clinton/Schumer plan.
They wanted one million dollars in funding for the Woodstock museum. Yes, thats right, a museum for a 38year old concert event.
And Congress wonders why they have a 14% approval rating?
They tried to slip in the funding request as a ride along with the education and health spending bill. Thankfully, it was stripped out in time.
And how about Louisana? All the money that was sent to New Orleans to fix the levy, waaay before Katrina made it's debut. Where did it go?
Who controlled the state, and the funds for that? Republicans?
Regarding education spending...
You really want more money for education, when we have spent billions and graduation rates are still low?
And, when there is a proposal to fix the broken school districts, we don't allow any competition, or vouchers.
Detroit turned down a 200 million dollar gift from philanthropist Robert Thompson to build 15 charter schools.
The teachers Union has a hissy fit because they had to compete with charter schools.
So, lets protect the teachers, and don't worry about the students.
And who is running the state and local governments in Detroit? Republicans?
No amount of money that goes into the Government coffers is going satisfy any politican, especially Democrats.
Any of the pet programs that Democrats propose, will never have enough money. No entitlement program they support, will go far enough to help everyone involved.
Try to fix Social Security, Medicare or Welfare, (which takes up a majority of the Federal Budget) and you are accused of all sorts of nefarious motives by the Democrats.
So, while Republicans might not have any new ideas, they do have some ideas that work. And cutting taxes is one of them.
Lower taxes create more revenues for small business and government alike. A favorable tax environment creates incentive, investment, and impacts employment.
Keep demonizing and financially punishing corporations and they we will hire less and outsource more.
Regarding O'Bama's tax plan.
Mr. Obama proclaims that he wants to raise taxes on people only making 250,000 dollars or more.
He will not be able to extract the amount of money he needs to implement the "goody bag" political promises he hopes to employ.
I don't think he can limit his tax increase to just one particular group of earners. People below the 250,000 dollar threshold will feel the "tax pinch" was well.
In addition, his increase in capital gains from 15 to 25% will not just impose "fairness" on the wealthy.
What about people who depend on stock income for their retirement, or day to day living?
In addition to an increased tax on income, they will have to pay an additional 25% on earnings because stock payouts are considered capital gains.
The investor class that will not like this at all. And some of them, dare I say it, are middle class. The very people that he claims to help.
If people like Warren Buffet, or anyone else feel that they are not taxed enough, then please, send extra money to the IRS. Don't tell me I am not paying my fair share..
I don't expect much from Government in general. I don't feel that Democrats or Republicans are the answer.
But, the only thing I would like them to do is to clean up their own house before telling me that mine is dirty.
Unfortunately, I don't think the wasteful spending days of Government will ever end, at least not in my lifetime..
While Republicans may not have any new ideas, I am not for higher taxes, and Bush at least came through with that promise.
Democrats are just selling the same product, only with different packaging. And I have never liked what they are selling..
Robert C.
The Wholesale Products Guy
Thanks for the response--it's pretty sweeping, but I can talk about a few of your points.
I guess the first thing I would say is that perhaps I am more sympathetic to your views than you might expect. For example, I agree with you that the President has little to do with the performance of the economy during his tenure (and I never claimed that this was so); and I agree that experimenting with vouchers and other school competition schemes is worthwhile and could yield good results. So it is not as if I reject all Republican ideas out of hand.
However, what I do reject is the refusal of many Republicans to soberly assess both the benefits and the costs of their tax policies. Yes, of course, a lower tax rate will make more money available for investment and business growth--but what is the tradeoff? If the tradeoff is that a top-quality education becomes inaccessible to the poor, then that might be worse for the economy in the long run because you will have a less educated workforce. If the tradeoff is that you can't afford to invade a medium-sized Middle Eastern country, then maybe you'd want to wait for a few years before cutting taxes if you think national security is a higher priority than faster economic growth. If the tradeoff is that Americans can't get access to affordable healthcare, well, then--maybe there's a lot of people in Michigan who'd be willing to make that tradeoff, seeing as how even a tax rate of 0% cannot magically return the American auto industry to its glory days.
So the point is: costs and benefits. I understand that there are costs to raising taxes to Clinton-era levels, but I think that--on balance--the benefits will outweight the costs. All too often, Republicans fail to take the time--and muster the intellectual honesty--to acknowledge the costs of cutting taxes even while we are at war, and even while we are, in historical terms, in a period of low marginal tax rates. All too often, the negatives of low taxes are dismissed with ridiculous, unsourced bromides such as that the government wastes "fifty cents of every dollar".
Since 1980, the country has been moving to the right; but the ideological movement that got us here is losing its relevance. The old ideas don't work because empirical conditions have changed. But they are the only ideas that many Republicans seem to have.
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