Consumer Corner: Should the rich be taxed at the same rate as the rest of us?

By MARCELLA S. KREITER, United Press International  |  Jan. 29, 2012 at 4:13 AM
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The dust-up last week concerning the national debt ceiling was a reminder just how precarious U.S. finances are these days and the level of partisan bickering that makes resolving the situation nearly impossible.

The national debt currently stands at some $15 trillion. Treasury wants to add a billion or so in borrowing authority to take the country past the November general election -- something to which Congress agreed after the August debacle that saw the nation's credit rating lowered and set up a congressional supercommittee that was supposed to come up with a plan.

That didn't happen, and Republicans last week tried to yank Treasury's credit card. They lost in the Senate 52-44, but the underlying issue remains.

How do we get the nation's finances back in line with its revenue intake?

The extreme right says cut spending, drastically; the extreme left says raise taxes, and really stick it to the wealthy.

The answer is somewhere in between, but cooler heads are having a hard time being heard, let alone prevailing.

Calls for a balanced budget amendment also are misleading. Proponents point out most states are required by law to operate on a balanced budget. What they don't say is states still have borrowing authority and balance their budgets by selling bonds -- just like the federal government.

In his latest bid to attack the debt/deficit problem, President Barack Obama proposed in his State of the Union address a 30 percent minimum tax on millionaires. The idea stemmed from an admission from billionaire Warren Buffett that he pays a lower percentage in taxes than his secretary. It gained traction after Republican presidential hopeful Mitt Romney released his tax returns, indicating he paid $3 million in taxes on more than $20 million in 2010 income, most of it from investments, which are taxed at about half the rate of wages.

To tax or not to tax, that is the question (to paraphrase the Bard).

The opposition to soaking the rich has been taken to heart since the Reagan administration. President Ronald Reagan championed "trickle-down economics." The theory says if the government lets the rich keep their money, they will invest in ventures that create more companies, leading to more jobs, higher-paying jobs and more wealth.

Nice theory, but the organization United for a Fair Economy notes that since the 1960s, when the top tax rate was as high as 91 percent, there has been little evidence cutting taxes for the richest Americans produces a commensurate increase in the growth of the gross domestic product. In fact, the group found, GDP grew more swiftly during the 1950s. The group also found little correlation between tax cuts and overall median income growth or increases in hourly wages. There also appears little connection between cutting taxes and the unemployment rate.

"Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole," the group concludes.

"To be sure, the economic indicators examined in this report are dependent on a variety of factors, not just tax policy. However, what this study does show is that any attempt to stimulate economic growth by cutting taxes for the rich will do nothing -- it hasn't worked over the past 50 years, so why would it work in the future? To put it simply and bluntly, [President George W.] Bush's top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth -- unless, of course, if you're talking about the size of the deficit."

So why are Republicans so tied to the idea? Obama has a theory.

"We need to change our tax code so that people like me, and an awful lot of members of Congress, pay our fair share of taxes," Obama said in the State of the Union.

Two percent of Americans make more than $250,000 a year. Even fewer make more than $1 million. How much would a 30 percent minimum tax on millionaires raise? Hard estimates are difficult to come by, largely because Obama's proposal came with no details.

Can such a proposal pass?

"The minimum 30 percent tax is actually pretty close to what at least some thought Congress was doing when it enacted the Alternative Minimum Tax that we now have, so it is not such a strange beast at all," said Charlotte Crane, professor of law at Northwestern University School of Law in Chicago.

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