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This Can't Last: Low Tax Rates, High Revenue Needs

David Callahan

Every time that President Obama emphatically repeats that he won't raise taxes on anyone making under $200,000 a year, as he did yesterday, I can't help but wince. Promising the middle class -- and a good swath of the upper middle class -- that their taxes will never go up is politically cowardly, economically irresponsible, and a betrayal of the progressive belief in government. 

Let me explain each of these charges in turn.

Political cowardice. Taxes are lower today for most Americans than they have been in decades, while deficits and long-term spending needs are higher than ever. President Obama might appear to be facing up to that reality when he proposes raising taxes on the affluent, but he isn't: simply repealing the Bush tax cuts on the rich will not raise much money compared to repealing all those tax cuts -- an option Obama refuses to even consider. This doesn't make any sense given today's low tax burden. As the New York Times just reported in a long and detailed article: 

most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

The Times has a great interactive graphic to show how much taxes have fallen for nearly every group. Among other things, this data contradicts repeated claims by progressives that its mainly the rich who've gotten tax cuts in the past few decades. In fact, taxes have gone down for everyone. 

Despite these historic low tax burdens -- and America's very obvious budgetary challenges -- a large majority of Americans oppose higher taxes. Only 13 percent of voters earlier this month agreed that income taxes should go up for everyone, according to exit polls. And only 33 percent agreed that taxes should be raised to help tackle the deficit. 

Now, it would be one thing if all these Americans against higher taxes also wanted to see spending cuts. But, of course, that is not the case. The American public wants low taxes for everyone and current spending levels. But that is unsustainable over the long run. If President Obama were courageous, he would challenge a deluded American public, not grovel to it. 

Economically Irresponsible. To prosper in the long-term, government in the United States needs to actually spend more money than it does today: on infrastructure, education, scientific research, and renewable energy. It also needs to strengthen a frayed social safety net, particularly as millions of largely indigent baby boomers grow too old to work. Yet that won't be possible if taxes remain so low on everyone and just rise on the rich. Already the United States is making cuts in important programs needed to grow the economy as a result of last year's budget deal. To nix crucial national investments in order to cater to an immature anti-tax public paying the lowest taxes in decades is not just cowardly, it's economically irresponsible.

Betrayal of Progressive Beliefs. Whatever the outcome of the fiscal cliff talks, conservatives seem poised for a decisive win on taxes. Today's tax burden is so low because of successive tax cuts pushed by the right. These tax cuts will largely stand if taxes only go up for the rich, and a continual downsizing of government will become unavoidable, reducing a range of programs that progressives believe in. It's appalling that the first Democratic president to win re-election to a full second term with over 50 percent of the vote since FDR would have, as his first order of business, handing the right a historic victory on the size and scope of government. 

Nobody wants to see the economy dip back into recession if the Bush tax cuts lapse in their entirety on December 31. But here's an outcome that would be far preferable: Let those cuts lapse, and then approve legislation in January that would restore many of the cuts, but only temporarily until the economy is stronger, and then phase out the Bush taxes cuts altogether.