[OPINION] How To Avoid Raising Taxes on the Middle Class or Cutting Programs the Middle and Poor Depend On

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robert_reichby Robert Reich

Brace yourself. In coming weeks you’ll hear there’s no serious alternative to cutting Social Security and Medicare, raising taxes on middle class, and decimating what’s left of the federal government’s discretionary spending on everything from education and job training to highways and basic research.

“We” must make these sacrifices, it will be said, in order to deal with our mushrooming budget deficit and cumulative debt.

But most of the people who are making this argument are very wealthy or are sponsored by the very wealthy: Wall Street moguls like Pete Peterson and his “Fix the Debt” brigade, the Business Roundtable, well-appointed think tanks and policy centers along the Potomac, members of the Simpson-Bowles commission.These regressive sentiments are packaged in a mythology that Americans have been living beyond our means: We’ve been unwilling to pay for what we want government to do for us, and we are now reaching the day of reckoning.

The truth is most Americans have not been living beyond their means. The problem is their means haven’t been keeping up with the growth of the economy — which is why most of us need better education, infrastructure, and healthcare, and stronger safety nets.

The real median wage is only slightly higher now than it was 30 years ago, even though the economy is twice as large.

The only people whose means have soared are at the very top, because they’ve received almost all the gains from growth. Over the last three decades, the top 1 percent’s share of the nation’s income has doubled; the top one-tenth of 1 percent’s share, tripled. The richest one-tenth of 1 percent is now earning as much as the bottom 120 million Americans put together.

Wealth has become even more concentrated than income (income is a stream of money, wealth is the pool into which it flows).

The richest 1 percent now own more than 35 percent of all of the nation’s household wealth, and 38 percent of the nation’s financial assets – including stocks and pension funds.

Think about this: The richest 400 Americans have more wealth than the bottom 150 million of us put together. The 6 Walmart heirs have more wealth than bottom 33 million American families combined.

So why are we even contemplating cutting programs the middle class and poor depend on, and raising their taxes?

We should tax the vast accumulations of wealth now in the hands of a relative few.

To the extent they have any wealth at all, most Americans have it in their homes – whose prices have stopped falling in most of the country but are still down almost 30 percent from their 2006 peak.

Yet homes are subject to the only major tax on wealth — property taxes.

Yale Professor Bruce Ackerman and Anne Alstott have proposed a 2 percent surtax on the wealth of the richest one-half of 1 percent of Americans owning more than $7.2 million of assets.

They figure it would generate $70 billion a year, or $750 billion over the decade. That’s more than the fiscal cliff deal raises from high-income Americans.

Together, the two sets of taxes on the wealthy — tax increases contained in the fiscal cliff agreement, and a wealth tax such as Ackerman and Alstott have proposed — would just about equal the spending cuts the White House has already agreed to, totaling $1.5 trillion (or $1.7 trillion including interest savings).

That seems about right.

Robert B. Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers “Aftershock” and “The Work of Nations.” His latest is an e-book, “Beyond Outrage.” He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

(This article originally appeared on Robert Reich’s blog Jan. 24, 2013)


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  • devany

    Mr. Reich is correct to see the need for a tax on net wealth but he seems to support the “soak the rich” method of imposing the tax on only the very wealthy and on top of an already progressive income tax structure. Using the net wealth tax base in a revenue neutral manner to replace the job killing payroll taxes and lower the income tax rate by eliminating all of the $1.3 trillion in tax expenditures is a better way to realize real tax reform.

    Let’s do the math. In 2010 total individual income in the U.S. was $12.5 trillion. The federal individual income tax produced $898 billion and the combined payroll tax generated another $865 billion (Social Security and Medicare). Tax revenue from the income base was 14.1% of total income. Typical wage earners below the $110,000 payroll tax limit pay the 15.3% payroll tax plus about 10% more in income tax. If workers pay above the 14.1% average, high earners, on average, pay much less. The $1.3 trillion in annual tax expenditures more than offset the higher marginal rates of the well-to-do business owners.

    Some of us think it is a bit obscene to give away $1.3 trillion primarily to business and high earners when this is more than twice the net wealth of half the country. This is particularly true when we realize that the tax code caused a loss of 70% of the net wealth of this group between 1995 and 2010 and they suffer the long term effects of unemployment. They are also subject to economic pressures sever enough to encourage the abortion of children that would be welcome under better economic conditions. Anyone who thinks the government should reduce benefits to this group is likely ignorant of all the facts.

    Too many economists fail to see that net wealth is a better measure of tax fairness. A tax blend of 2% net wealth and 8% income could replace all current revenue from the income base and provide a long term replacement for the job killing payroll taxes (that really don’t fund Social Security or Medicare). Even though rich and poor would pay the same tax rates the liability would be progressive because the top 10% have 75% of the net wealth and the lower 50% only have 1% of the net wealth.
    A small 4% value added tax (VAT) would enable the C corporation tax rate to be reduced to 8% to match the pass-through business entities. It would also encourage foreign corporate profits to be repatriated since foreign earnings are not be subject to a U.S. VAT.

    Historically the tax loopholes and credits which create the budget deficit and national debt have been adopted by congress to offset the high marginal rates. The low tax rates are made possible by a savings of $1.3 trillion because no tax expenditures can be justified with an income tax rate of 8% or less.