Economics, Taxes and Spending

Denying the Obvious: The Limits of Taxing the Top 3%

President Obama has consistently promised to raise taxes only on people with incomes above $200,000 ($250,000 for couples)—roughly 3 percent of the population—and to cut taxes for those with lower incomes. Within the last week, however, a New York Times editorial and an article by David Wessel in the Wall Street Journal have pointed out an inconvenient truth about this pledge: it is not possible to raise enough revenue to close the country’s fiscal gap solely from a small group of high-income households. To be sure, those households earn a significant share of national income, a share that has risen in recent decades. But no feasible increase in their marginal tax rates can close the existing budgetary imbalance, let alone finance new spending. Fiscal measures that go beyond taxing the highest-income households may, or may not, be deferred until after Obama’s presidency, but they cannot be avoided.

As I recently observed, the infeasibility of taxing only the top few percent has been recognized by a wide set of economists and commentators. The list includes 2008 Nobel economics laureate Paul Krugman, the editors of the Washington Post, Roberton Williams of the Urban-Brookings Tax Policy Center and the Center’s former director, Leonard Burman, Stuart Taylor of National Journal, New York Times columnist David Leonhardt, Washington Post columnists Steven Pearlstein and E.J. Dionne Jr., and Clive Crook of The Atlantic.

The unavoidable reality is that much of the burden of addressing the fiscal imbalance will fall on the middle class, broadly defined, either in the form of tax increases or entitlement reductions. That reality may not be pleasant, but it will be less painful if faced sooner rather than later.

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