There is a large emphasis on the federal budget and debt this year due to the budget debate for last year's budget and the looming debt ceiling. A lot of discussion has gone around that we need to cut spending (LOTS!) to get some control on it. There are definitely things that could be cut, especially in our bloated defense budget. Subsidies to big businesses that are making record profits are another place to look. There are two main problems, however, with the way the discussion is happening .
The first major problem is the complete refusal of too many politicians to even consider raising any taxes at all. This is a very flawed position. In the 2010 federal budget there was only about $660 billion in discretionary spending. As of May 6th this year the public debt was $14.32 trillion.[1] Even if we cut all discretionary spending, the debt would continue to rise, as we're running a deficit of over a trillion dollars. Nothing short of a near-complete gutting of the services the federal government provides would be able to solve the deficit and eliminate the federal debt. This is not only unlikely to the point of impossibility, it is also contrary to the interests of us as a nation. Any serious plan to tackle the debt and deficit problem MUST include tax increases. There is no other way around it.
The top marginal tax rate in the US is currently at 35% for someone making $200k or a couple making $250k a year. This is historically very low. Except for a brief period during Bush Sr.'s presidency where the top tax rate dipped to 28% (of course the cutoff point on income was lowered greatly to around $30k per year) the last time the top rate was lower was at the start of the 1930's. [2] One argument going around against raising taxes talks about an ever increasing tax burden which as we can see from the above just isn't true. It is hard to measure exactly how much a tax increase or decrease will affect government revenue, so I'll just give the example of how much it was estimated the 'Bush Tax Cuts'(a lowering of the top marginal tax rate from 39% to 35%) cost the federal government in revenue. The high end estimate (the only estimate that was done) of how much they cost over 10 years is 2.1 trillion dollars.[3] Assuming this trend would hold, (Which again is hard to predict exactly due to the finicky nature of finance.) repealing the Bush tax cuts would raise roughly 200 billion dollars a year, or around 6 times the amount that Congress actually agreed to cut in April.
Another place to look at in raising taxes is the capital gains tax. Capital gains have always been lower than traditional income taxes, due to the idea that investors need incentives to invest in entrepreneurial activity. Capital gains taxes are split into two categories, short term and long term. Long term applies to any assets held for over a year. Short term are taxed at the traditional income rate, for the rest of this post when I talk about capital gains I will be referring to long term. Capital gains taxes however are significantly below income taxes, with the bottom two brackets at 0% and the top 3 brackets at 15% (brackets based on traditional income). The difference between income and capital gains taxes for the top bracket is more than double(15% for capital gains 35% for traditional income). I would imagine that gap could be narrowed quite a bit and still provide enough incentive for investment.
The last one I will mention is corporate taxes. If you've been paying attention to news in recent months you'll have noticed that there are several large corporations that not only paid nothing in taxes, but got sizable refunds from the government. GE a company that made $5.1 billion in US profits, $14.2 billion worldwide profits not only paid nothing in taxes, but received $3.2 billion from the federal government.[4] Currently the top corporate tax rate is 35%, however there are a myriad of loopholes and most corporations do not pay anywhere close to that. If we took the corporate tax code, and cut out most if not all of the loopholes, I could even see lowering the tax rate. For example I would rather see the effective tax rate(what is actually paid in taxes) go from 10% to 15% by eliminating loopholes and lowering the tax rate to 15% than I would in seeing the effective rate changing the same amount just by raising the tax rate to 40%. The numbers in the last example were chosen randomly, I'm not sure what the actual effective tax rate is for corporations. Also while only tenuously related to corporate taxes, subsidies for corporations is somewhere else to look. I don't think companies such as oil companies that are making record profits year after year need the subsidies they receive from the US.
The second major problem is who and what are getting blamed for our economic problems and who and what are being asked to sacrifice to fix them. It doesn't take an economist to tell you what has caused the federal debt to skyrocket and the deficit to rise over the last decade. It all boils down to three things, not that any one of these is a sole cause, but combined together were disastrous. The first is the Bush tax cuts, again while it may have been fine without the other two, combined helped cause the problems we're seeing. The second one is the wars in Afghanistan and Iraq. This isn't saying anything as to the justifications or validity of those wars, however wars cost money, and you don't pay for wars by cutting taxes. The third is the economic collapse and subsequent bailout of large corporations and banks. Without the two previous reasons, or even if we had financed the wars with tax increases, perhaps we would have been able to handle the bailouts without going broke. Or maybe we didn't have to do as much bailing out as we did? Those are the three reasons the federal debt is so high and deficits have been rising. To be fair, there are more reasons, as economics is fairly complicated, and have tendrils in all aspects of life, however, these three are the main causes.
Following the above I find it ridiculous that people have attempted to put the blame on public sector unions. Disregarding whether you think they are more trouble than they worth, are worth every penny, or not worth a rusty nickel, the idea that they are to be blamed for any economic insecurities would be laughable if it wasn't being taken so seriously. In Wisconsin, the governor and most of the legislature went after not only public union worker's wages and benefits, (on which the workers were willing to accept cuts) but also after the existence of the unions themselves; all in the name of balancing the budget. This may have been more believable if it wasn't for tax cuts for corporations passed just a month earlier. [5] This is a case of someone taking the crisis and using it to push an unrelated ideological agenda (in this case fighting against unions).
There are cases of cities attempting to end or get around nonprofit's tax exempt status.[6] In no way are nonprofit's related to budget shortfalls and there is no reason to go after them. Nonprofits provide valuable services to the communities they are in, which traditionally have been recognized in the form of a tax exempt status. The idea being that they provide as much if not more benefit than they would if they were paying taxes. I doubt there's any less value being produced by these nonprofits, so why do they need to start paying up now? Also why is it okay to talk about raising taxes on nonprofits, but you can't talk about raising them on millionaires, billionaires, and corporations making billions of dollars in profits?
This whole dilemma is ridiculous. When did we become so afraid of raising taxes? To have an effective, adult conversation about the budget, raising taxes has to be a potential option. There are no two ways about it. You cannot have a workable, realistic solution to the budget and debt problems without increased taxes being part of that solution. Given the way sentiments are on Capitol Hill, our congresspeople need to hear from us that we are okay with raising taxes, and that they need to represent us all, not just the big money interests.
1 Wikipedia: United States federal budget
2 Truth and Politics: Top US Marginal Income Tax Rates, 1913--2003
3 Tax Foundation: How Much Did the Bush Tax Cuts Cost In Forgone Revenue?
4 MSN Money: GE's corporate tax bill: Zero
5 Daily Reporter: Wisconsin Legislature passes tax cut
6 NPR: Cash-Strapped Cities Put The Squeeze on Nonprofits
