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The Rich Can’t Do it Alone

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

The President’s budget deserves the mixed reviews that it has received. On the one hand, his proposals would stabilize the debt over the next decade and look beyond cuts in discretionary spending to accomplish these goals. On the other hand, they fail to address the real problems that arrive thereafter when entitlement spending accelerates and taxes fall short.

On the tax front, the President makes a number of proposals to increase revenues, but the main revenue raiser is allowing the 2001 and 2003 tax cuts to expire for those with household income above $250,000. In addition, the President proposes to limit the value of itemized deductions and other preferences to 28 percent for households with incomes over $250,000. And the President supports the return of the estate tax exemption and rates to 2009 levels ($3,500,000 and a maximum rate of 45 percent).

The message in these proposals is that 2 percent of households can solve the nation’s deficit problems. That is not correct. Everybody needs to participate. All the Bush tax cuts should be allowed to expire at the end of 2012. If the economy is too weak to raise taxes at that time, link the expiration to an unemployment trigger. That is, half the cuts would be eliminated once the unemployment rates hits 7.5 percent, another quarter at 6.5 percent, and the remaining quarter at 5.5 percent.

We never needed and could never afford the cuts in the first place. In fact, the reason they were originally slated to expire was a budget gimmick to disguise their long-run costs. If we don’t get rid of the tax cuts now, they will do more damage to our nation’s fiscal future.

In this environment where raising taxes is virtually impossible, policymakers concerned about long-run deficit reduction cannot pass up the only opportunity available – namely, allow tax cuts to expire. In other words, if Congress does nothing, rates will rise. To advocate against such an expiration – regardless of campaign promises – suggests a lack of concern for the long-run fiscal challenges.

Moreover, I don’t like the rhetoric. Dividing the nation’s households into the “wealthy” and “the middle class” creates one more fissure in a country that is already fractured along so many dimensions. It pits the majority of Americans against the top 2 percent. It suggests that the majority of Americans should not be called upon to solve the nation’s fiscal problems. It violates the notion that we are all in this together. Yes, the rich can contribute more, but we can all contribute something.

Allowing the Bush tax cuts to expire for everyone will restore a sense of national unity. The progressivity of the personal income tax will ensure that those with higher incomes pay more — $803 for a household with a cash income of $40,000-$50,000; $1,677 for a household with $100,000-$200,000; and $18,529 for a household with $500,000-$1,000,000.

In addition to helping to solve the long-run deficit problem, eliminating all the Bush tax cuts would set the stage for tax reform. Tax reform inevitably creates winners and losers. If revenues are available to help pay off some of the losers, the process will be a lot easier.


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    • Our political class have proven over and over again that they are incapable of managing increased revenue. When their salaries are tied to how well the budget is managed, then we might start seeing things move in the right direction.

    • To cut government spending, even wastefull defence spending, would bring the recovery to screeching stop. Any honest economist will tell you that. The Bush and Reagan tax cuts did nothing but bring on a speculative boom then a crash. A fraction of the 1% has most of the wealth earned by hard working people and is using it to buy political power.

    • The comments are as sad as they are predictable. Of course all of the Bush tax cuts need to go away, as they were one of the primary reasons that our country went from a budget surplus to a budget deficit over the past decade. Yes, we need to cut federal spending (and I’d start with our bloated $1T+ military), but we *also* need to raise tax revenue.

      Just like in a family situation, when you are deep in debt a) you cut spending and b) someone goes and gets a second job.

      Any politician who claims to be able to fix everything with no pain to anyone is clearly lying.

    • The year: 1787. A Scottish professor at the University of Edinburgh made a comment about democracies–dating back to the Athenian republic some 2000 years ago. “Most democracies last 200 years. But when the voters discover they can live off the public treasury, it soon will decline into dictatorship” (paraphrased). Something to think about.

    • Me again… Allowing the tax cuts to expire will trigger an increase in spending. Washington has NEVER CUT ANYTHING that is why we have a deficit. In my own bank account I cannot keep spending what I ‘wish’ I had coming in as far as income. I have to spend less than what I actually have coming in. The only solution to the insanity is to STOP THE SPENDING and REDUCE TAXES ON EVERYONE at the same time!! More money comes in when taxes are reduced and the losses we all suffered in the crash have now been used up against gains. If the fed would reduce the cap gain and dividend hit we would all move our money around and MORE, not less, would come into Washington. But, they still would need to CUT SPENDING !!

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.