Lets Go Off the Cliff (And Football Too!)

First, the fiscal cliff and then some football comments…

Here are four reasons why I think we should go off the cliff with respect to individual income taxes – in other words, let everyone’s tax rates increase:

1. Our tax code is already progressive.

Here’s a chart (from the CBO) that shows that the top 20% of earners received approximately 50.8% of the income and they paid approximately 67.9% of the taxes.

Tax income

Of course, the idea of raising taxes on couples making more than $250K (or individuals making more than $200K) really involves the top 2% – 4%.  So, let’s look at the tax progressivity of the top 1% of earners.  If you look at the amount of income that was earned by the top 1% and the taxes that they paid from 2007 – 2009, you’ll find:

2007 – earned 18.7% of income and paid 26.7% of taxes

2008 – earned 16% of income and paid 25% of taxes

2009 – earned 13.4% of income and paid 22.3% of taxes

Two things to think about with this: (1) The decreasing percentages are natural in a recession.  Income inequality declines due to smaller bonuses, fewer capital gains and fewer profits.  (2) Most Americans favor progressivity.  We can argue about wanting more or less, but we certainly have some progressivity at the top.   In sum, I would say that we really don’t have any compelling evidence that the taxpayers in the top 1% are not paying their fair share.

2. Raising taxes on couples making more than $250K will not make a dent in our problem.

In a separate CBO report (than the one mentioned above), they examined how much we need to cut from the budget in order to stop our debt-to-GDP ratio from continuing to rise.  They looked at a single year (2020) and estimated that we would need an additional $750 billion in taxes to reach this goal (or we could cut spending by that amount).

If we raise taxes solely on the high-income earners and we extend all other tax benefits that came during the past twelve years (Presidents Bush and Obama), we would raise an additional $110 billion in 2020.  We’d still be $640 billion short.  In other words, we’ll accomplish nothing.

If we let all of the tax cuts expire (so everyone who pays taxes would pay more), the estate tax and gift tax provisions enacted in 2010 would expire as planned and we don’t index the AMT for inflation, we’ll raise an additional $550 billion.  In other words, we’d be approximately 70% of our way to where we need to be.  (The CBO did not break out how much came from the AMT, the estate and gift taxes or the increase in the tax rate of everyone below the highest earners.)  See exhibit below.

3. If we all feel the pain, maybe we’ll finally address the real issue.

 If everyone is paying more taxes, we can have a real discussion.  Do we want to pay more taxes or do we want to cut some parts of the entitlement programs?  No one is going to be totally happy with the solution, but we’ll all have a vested interest.  We’ll either be paying for what we hope to receive or we’ll decide that we don’t want to pay for it and we’ll cut the programs.  But, it’s ludicrous to continue the promises without paying for them.  How do you make a reasonable decision when you’re receiving benefits (or you’re being promised benefits) and you’re not paying full price for them?  Of course, no one wants to cut entitlements under those circumstances.

4. If we eventually need to raise taxes again (and if we just raise taxes on the top income earners, I promise that we will have to raise taxes again), what will we do then? 

Will we again go back to the highest income earners?  In other words, we’re just setting ourselves up for future problems.

In my opinion, this is not the time to discuss the issue of income inequality.  (I’m very uncertain that taxes are the solution to that problem.  Instead, we are dealing with the problem of an unfunded liability.)  We need to decide as a nation whether we want to fund these programs or we want to cut them.  But, we’ll have the best discussion if we’re all feeling the pain – so we can decide whether the pain is worth it or not.

Some Football Comments

Quick comments:

1. Wow!  What a game.  I can’t believe that Alabama just won their third national championship in four years.  (Just kidding all you Notre Dame fans.)

2. Before the game, I said to several Alabama fans that if we lose, there’s no coach that I’d rather lose to than Mark Richt.  Everyone agreed.

3. There is a TREMENDOUS amount of luck involved with winning a national championship.  Obviously, Georgia can talk about the final play of the game (as well as other events).  If we lost, Alabama fans would have talked about whether the pass was tipped (negating an interference call and the next play resulted in a blocked field goal and touchdown for Georgia).  Notre Dame detractors will talk about Pitt missing the field goal in overtime.  Oregon had one simple missed block against Stanford that might have changed the game.  I could go on and on with little things that happened to Florida, Texas A&M and plenty of other schools.

4. Since some Notre Dame fans think that I’ve been derogatory toward their team, I thought that this would be a good time to say some nice things about them.  Unfortunately, I couldn’t think of anything nice to say.

5. Just kidding.  How about this: regardless of what other people may say, I think that if Notre Dame played in the SEC, they would still be bowl-eligible.  Did that help soothe your feelings?

6. Finally, let me say to all you Notre Dame fans, you need to realize that this is all fun and games.  Don’t take any of it seriously.  It’s important that you really enjoy this experience.  It only happens once every 25 years for you.