The best way for Congress to tackle the budget deficit is to do nothing for the next year. That's because, under current law, the Bush tax cuts will expire at the end of 2012 and a range of spending cuts will take effect. As well, tax cuts enacted under President Obama will also expire or be reduced, including expansion of the EITC, the Child Tax Credit, and the temporary payroll tax cut. Together, this combination of new revenue and cuts would amount to some $7 trillion in deficit reduction beyond realistic current policy -- bringing the national debt down to under 60 percent of GDP, a lower level than any budget plan now being discussed, including the Ryan budget.
Now, for a bunch of reasons, this "taxmageddon" scenario would be bad news, with way too many tax hikes and budgets cuts at once given the fragile economy. But there's one part of this picture that is appealing -- which is repealing the entire Bush tax cuts, including those on the middle class.
No Democrat, and few progressives at all, are advocating a full repeal and middle class tax hikes. But this should be exactly our goal.
To refresh people's memory, the Bush tax cuts -- all of them -- were a bad idea in 2001. That's because honest analyses of the budget back then showed that supposed future surpluses were largely an illusion -- and this was before all the new security expenses incurred by 9/11.
If the Bush tax cuts were unaffordable back then, they are even more unaffordable now. And here's the thing: the lion's share of those tax cuts go to the middle or upper middle class. Extending the Bush tax cuts for another decade would cost about $3.8 trillion, with only about $700 billion of that going to the top 2 percent of households.
In other words, if we really want to bring in serious revenue -- either for deficit reduction, public investment, or both -- those middle class tax cuts have got to go.
I will come back to the economic effects of raising taxes on the middle class in another post. Here, let me make the fairness and fiscal case for such a tax hike.
In a recent blog post, Bruce Bartlett shows that the average federal income and payroll tax rate for middle class households is now at the lowest level since 1967. Meanwhile, taxes on working class households are at the lowest levels in modern memory. Analysis by the Center on Budget and Policy Priorities has shown the same thing. Indeed, CBPP has pointed out that taxes on the middle class were already at the lowest level in twenty years before the Bush tax cuts were enacted in 2001.
So it just wrong to say that the middle class are already paying too much in federal taxes. In fact, they have almost never paid less.
These low tax rates don't make sense. Quite apart from the imperative of long-term deficit reduction, this nation needs to invest heavily in the foundations of prosperity -- education, infrastructure, renewable energy, scientific research -- if we're going to have a robust middle class at all in coming decades. And we need to pay for the retirement of the boomers.
More broadly, the federal government is a lot bigger and does much more than it did three or four decades ago. All taxpayers thus need to be paying more if we want to sustain this scope of government, which polls generally show is the case. To give two examples: the federal government spent $8.2 billion on education in 1976 -- and $68 billion in 2011; $772 million on the EPA in 1976 -- and $8.6 billion in 2011.
Progressives who believe in strong government shouldn't just be asking the rich to pay more. We should be asking all Americans, since we all benefit from a more expansive government.