In their latest proposal, as reported by Bloomberg, Democrats are offering to keep the maximum 35% income tax rate.
The Democratic proposal includes a so-called trigger that would raise $650 billion if the U.S. tax code isn't revamped by Jan. 1, 2013, according to a document that party members are circulating. Tax writers would receive instructions to cap individual tax rates at 35 percent, overhaul corporate taxation and maintain the progressivity currently in the code.
When the Republicans are unlikely to agree to any tax increases, why should the Democrats keep proposing inadequate tax increases? Shouldn't they be making a forthright case to the American people for making the wealthy pay their fair share, the share they paid in more prosperous decades before 1980? The maximum tax rate was 70% before the Reagan-era tax cuts. It would revert to 39.6% if the Bush tax cuts were allowed to expire.
The article makes no mention of increasing the tax on capital gains. The reduction of the tax rate on capital gains to the current maximum of 15% is a major factor behind the increased concentration of income and wealth in the United States. Taxing capital gains like other income should be a central element of any Democratic Party proposal. It would benefit all but the wealthiest Americans.
Under the Democrats' proposal, if Congress doesn't agree to a tax code overhaul with a 35% maximum rate, that would trigger a limit on itemized deductions for high income people and a surcharge.
If Congress doesn't agree to a tax-code overhaul, the trigger would generate $325 billion by limiting itemized deductions for top earners. The proposal refers to an idea floated by Harvard University economics professor Martin Feldstein, who said individuals shouldn't be able to claim itemized deductions that provide benefits of more than 2 percent of their adjusted gross income.
The remaining $325 billion would come from a surcharge on individual income tax liability before credits. Details of the surtax weren't included in the document.
Nothing wrong with limiting deductions for wealthier taxpayers, but overall the Democratic plan for increased revenues is weak, and will ensure that there will be inadequate tax revenues to support Medicare, Medicaid, and important domestic discretionary programs for years to come.
The Democratic plan includes only minor cuts to the military budget. With military spending now around $700 billion a year, proposing cuts of $200 billion over ten years doesn't do much. Let's not forget that with 4.5% of the world's population, our country accounts for about 43% of the world's military spending. We spend far more, as a percent of GDP, than any country in Europe. We spend more than China, Russia, France, England, Germany, Italy, Spain, Japan, Saudia Arabia, Israel, India, Brazil, Canada and Australia combined.
The Democrats on the committee are proposing $350 billion in cuts to Medicare.
The Democratic plan also would include $350 billion in cuts to Medicare, with $250 billion from providers and $100 billion from beneficiaries. An additional $200 billion in cuts would come from other mandatory programs. The plan would include $400 billion in cuts to discretionary programs, with $200 billion from defense and $200 billion from non-defense programs.
Jeffrey Sachs, in his latest book, the Price of Civilization, notes two ways in which the U.S. differs from other advanced industrial nations. First military spending is much higher as a percentage of GDP in this country. Second, total taxes, federal, state and local, are a much lower percentage of GDP in this country. Taxes amount to about 30% of GDP in the U.S. while they are over 50% of GDP in the Scandinavian countries, and between 40% and 50% in other European countries like Germany, France, Italy, and the Netherlands.
As the Center for Budget and Policy Priorities has shown, the deficits are the result of the Bush tax cuts, the wars in Iraq and Afghanistan, combined with the hopefully short term impacts of the economic downturn and the bank bailouts.
Sachs also notes in his new book that the income of the top 1% after taxes amounted to 3.3% of GDP in 1970. Now it is equal to 10% of GDP. The current gap between federal spending (equal to 24% of GDP) and federal tax revenues (18% of GDP), is 6%, about the same as the increase in the after tax income of the 1% as a percent of GDP.
Sachs also notes that the corporate income tax is now a "seive"; the amount collected in the 1960s amounted to 3.5% of GDP, while now it amounts to only about 1.5%. The Democrats are calling for an overhaul of corporate taxation in their, but clearly don't see it bringing in much money.
A progressive solution to the deficit problem should address its sources: unwarranted tax cuts and tax breaks for the rich and corporations and excessive military spending. While making Medicare as efficient as possible, dealing with fraud, etc., is always desirable, it is not necessary to impose greater costs on Medicare beneficiaries. As long as Democrats on the Super Committee are just pushing Republican-lite proposals that would cut Medicare while freezing in place a maximum tax rate of 35%, I can only hope that the whole thing blows up.
