I Don't Get It-- Or He Doesn't

There's been a glaring omission in the public discussion of Obama's new budget proposal, and in the proposal itself. No, I'm not talking about entitlements. That subject is missing from the proposal, but not from the commentariat's discussion of it, in which no article would be complete without using the "e"-word five or six times. No, what's missing is the "t"-word. That's right, taxes.

Yes, there are some tax increases in Obama's budget. He tries again to let the Bush tax cuts expire on people making over $250,000 a year, trims deductions a bit, and eliminates some corporate tax loopholes. But he is apparently setting in stone the principle that top marginal rates may never exceed 39.6 percent.

The budget is supposed to reduce the deficit by $1.1 trillion over ten years. (Does anyone else find this whole "over ten years" business confusing? It sort of sounds like the deficit ten years from now will be $1.1 trillion lower, but that's wrong-- actually it's the debt that will be $1.1 trillion lower.) $1.1 trillion is a nice number, but here's a nicer one: $2.5 trillion. Why not really put some pressure on the Republicans? They're going to have to match that, don't forget, without new taxes or cuts in defense spending.

Here's how we do it.  In 2008, a very bad year for people at the top of the income distribution, those in the top 0.5% collectively had adjusted gross income on their tax returns of $1.4 trillion. Take a quite moderate 10% more of their income over ten years and you get $1.4 trillion.  $1.1 trillion  + $1.4 trillion = $2.5 trillion. This includes people  whose adjusted gross income is $559,000 and up. If you wanted to limit it to people whose AGI is $1,695,000 and up you would get about half a trillion less over ten years. I think we can skip the cuts in low-income energy assistance, don't you?

(In earlier postings I had even higher numbers, but I was calculating, I think, as a fraction of GDP; adjusted gross income is a better estimate of what you could get from taxes.You can get the figures here by going to the first article under "Income and wealth inequality" and clicking on the Excel chart. Go to Table 0 and multiply columns E and F. )

Would the public go for this? Polls show there is very strong public support for increasing taxes on the rich as a way to deal with the deficit. That's not surprising. As Russell Long used to say, "Don't tax you, don't tax me, tax that fellow behind the tree."

Apart from that, there's clearly some bad feeling toward the rich right now. A lot of the anger that was visible in last year's election came from a sense of the impunity of the people who made everyone else suffer, and new taxes on the rich would give people a sense that perhaps the plutocrats don't completely control the system.

But the right way to frame the issue, it seems to me, is not to portray this as a way to get even with the rich for screwing up the economy, and not as a way to reduce our glaring income disparities, but simply as asking people who have done very well for themselves recently to do their fair share. How well have they done for themselves? Here are some more figures (Table 1 in the chart in the link above):

Real Annual Income Growth by Groups, 1993-2008

Top 1% Incomes                   3.94%
Bottom 99% Incomes      0.75%

So why hasn't Obama talked about this? One possibility, and I must say a plausible one, is that the plutocrats really do control the system, or at least have a lot of power. A lot of people on Wall Street who gave money to the Democrats in 2008 deserted them in 2010, and perhaps Obama doesn't want to risk alienating them further.

But I think the problem is connected more to something I've talked about before: that Obama sees his role as a negotiator with Congress, rather than a leader. If the Republicans aren't going to go for tax increases, why get them riled up?

The problem is that this lets Republicans define the set of thinkable policy options (sometimes called, I recently learned, the "Overton window"), which is why that window has been slowly creeping to the right. Somehow, the far left position on the deficit is that the very rich, along with the somewhat rich and the very comfortable, should be taxed at 39.6%. Yet since World War II we've had top tax rates as high as 91% without crippling the economy (though 75% was better). This fact will not enter into the debate on the budget for the coming fiscal year. That debate will be over whether we need to make big cuts or small cuts, and who's going to go first on entitlements.

In contrast, if the possibility of taxing the top 0.5% at, say, 55% were on the table, the debate could be quite different. We might also have a chance of doing something significant about the deficit.