The Long Campaign to Tax “The Rich”: By Any and All Means Necessary?
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Since the bipartisan passage of President Bush’s tax relief program in 2001, there has been a relentless drumbeat from the left that components of the tax relief allegedly benefiting only “the rich” should be repealed. Recent events underscore that the purpose of seeking such higher taxes is not to reduce the federal budget deficit but instead to fuel the insatiable spending appetite of the federal government. This determination to raise taxes has taken many forms over the past decade, and while some proposals have been enacted, proponents have made clear that much more is on the way.
Over the past several years, many rationales have been offered for raising taxes: improving the federal budget outlook, increasing the tax code’s progressivity, shoring up Social Security, extending Medicare solvency, or paying for health care reform. The only constant has been the nearly theological imperative, on the left wing of the Democratic party, to impose higher taxes – regardless of what is done with the money.
This dynamic created a schism within the Democratic party after 2001. Moderate Democrats had supported President Bush’s tax relief – to strengthen economic growth, to reduce federal tax burdens relative to then-historic highs, and to mitigate the long-term effects of persistent bracket creep. But liberal Democrats remained fixated on repealing as much of the Bush tax relief as they could. Today, many of the figures calling for repeal or elimination of Bush tax policies now hold influential posts within the Obama Administration and within the Congress.
Peter Orszag, now Director of OMB, stated in 2004, “my view is that the tax cuts are simply not affordable and therefore should be substantially scaled back or repealed altogether.” Director Orszag has over the years helped craft many policy initiatives toward that end.
Unlike Dr. Orszag, however, few elected Democrats were willing to suggest repealing the Bush tax relief program for all income classes, instead calling for higher tax rates only on the “wealthy.” Those “wealthy” are now defined by the Obama Administration as families and small business owners with more than $250,000 in annual income ($200,000 for individuals).
This much of the left’s tax-increase program has remained consistently exposed to public view. Policy makers in the Obama Administration, like other influential Democrats over the past decade, have made no secret of their intention to impose higher marginal income tax rates on upper-income Americans starting in 2011.
What has largely escaped public notice, however, is how relentless and varied have been these efforts to increase taxes – as well as how the tax program, taken as a whole, would increase rates well above those in effect even before the Bush tax cuts. Moreover, parts of this tax increase program have already been implemented, yet the heated rhetoric about scaling back “tax cuts for the rich” persists.
In 2002, Orszag and collaborator Peter Diamond authored a Social Security reform proposal that was a typical left-of-center Social Security reform plan. It sought long-term balance mostly by increasing the payroll tax (both the rate and the base) along with some minor benefit changes.
But also included in the Diamond-Orszag plan was a novel provision: a new 3% tax on income above Social Security’s taxable wage limit (now $106,800). Unlike normal contributions to Social Security, this new 3% tax would have no accompanying benefit credits. In fact, it wouldn’t have been integrated with Social Security benefits at all – it was a pure 3% surcharge. Had this provision become law, it would now be applying to all individuals with more than $106,800 in income, and couples with more than $213,600.
Such a tax would have represented a sharp break with Social Security’s historic design. The program has never enforced means-testing; tax contributions have always earned benefit credits for rich and poor alike. The new Diamond-Orszag “legacy tax,” however, would be entirely separated from the program’s benefit structure, raising the question of why it was included in a Social Security plan. The real (and presumably purposeful) effect of the “legacy tax” would simply have been to undo most of the tax relief for these taxpayers recently delivered by the Bush Administration.
Indeed, the determination of Diamond and Orszag to apply a new Social Security tax in proportion to individuals’ “full earnings” betrayed an ongoing policy objective extending well beyond Social Security. Later, in 2008 when the Obama campaign unveiled its tax platform, the Diamond-Orszag concept curiously arose once again. This is how an Obama campaign document described a similar provision:
“Obama Has Called For a Bipartisan Social Security Solution That Asks the Wealthiest Americans to Contribute Their Fair Share. As part of a bipartisan plan that would be phased in over many years, he would ask those making over $250,000 to contribute a bit more to Social Security to keep it sound. Instead, Obama and Biden are considering plans that would ask those making over $250,000 to pay in the range of 2 to 4 percentage points more in total (combined employer and employee).”
The Obama campaign was somewhat cagier than Diamond-Orszag in describing the proposal. The charge was no longer 3%, but rather “in the range of 2 to 4 percentage points.” The candidate was merely “considering” a plan that would “ask” for the additional tax to be paid. And now the tax applied to families earning more than $250,000 instead of everyone over the current taxable wage cap.
This last stipulation led to some ambiguity from the Obama campaign. Would these additional Social Security contributions, like others, earn benefits or would they (like the Diamond-Orszag proposal) sever Social Security’s contribution-benefit connection? Each potential answer was explosive. Either the Obama proposal would result in a benefit increase for the wealthiest Americans, or else it was an unrelated tax increase that would commence the “welfare” financing of Social Security. The campaign simply declined to answer this question, saying that the details remained to be worked out.
But make no mistake; even with the unanswered questions, the proposal was essentially the old Diamond-Orszag provision, albeit confined to a subset of those who would have been hit by the original version of the tax.
Earlier this year during the debate over health care reform, an opportunity arose to apply the surcharge. Desperate for revenue to fund the enormous cost of the health care bill, the Administration and Congress agreed to apply a new Medicare payroll tax – once again, on small business owners and families with incomes over $250,000 (individuals over $200,000). The provision would increase the Medicare payroll tax on wages for these people from 2.9% to 3.8%. Furthermore, it would expand the income to which this tax applied – for the first time, applying this new 3.8% tax to investment income as well as wage income. According to the Joint Committee on Taxation (JCT), the new tax would raise $210 billion over ten years.
It is easy to understand the temptations to impose the new tax in this way and in this place. First, by applying the tax to Medicare rather than to Social Security, the Administration escaped one problem with the original Diamond-Orszag tax (i.e., whether to credit it towards additional benefits). This problem doesn’t arise in Medicare taxation, where all participants essentially have the same benefit package no matter how much they contribute. Second, applying the tax to Medicare also allowed proponents to exploit the bookkeeping effect of an extension of Medicare solvency via health care reform, even as the money was actually being spent on expanded coverage.
By extending the tax to investment income, the Administration has opened up a whole new realm of Americans’ income to potential taxation to fund these programs. This taxation of investment income has started above the $200,000 threshold; but who is to say where it will ultimately end?
Another important aspect of this tax should be noted: by spending the new tax revenue on expanded health care coverage, the Administration and its Congressional allies clarified that their desire to increase these taxes was not, despite prior rhetoric, about improving the budget outlook.
Proponents could have chosen to raise the Medicare tax and to apply the proceeds to deficit reduction. They did not. They chose instead to spend the money on a new health care entitlement. Despite a decade of rhetoric about the fiscal problems created by the Bush tax cuts, the choice was made when the taxes were ultimately raised to fuel additional federal spending with it. It is now clear that these opponents of the Bush tax cuts were concerned by them not because they worsened the budget outlook, but because there was a desire to spend that money.
Raising these families and small businesses’ taxes by $210 billion to fund the new health care entitlement might seem, at first glance, to have accomplished much of what the Administration had proposed to do in repealing the Bush tax cuts “for the rich.” After all, the Administration’s budget aimed at raising $380 billion from these same sources by allowing some current tax rates to expire. Over half of that particular tax increase has now already occurred. Yet there has been no suggestion that the Administration is retreating from its intention to allow the current tax rates to expire for these tax brackets at the end of 2010. Moreover, in the same budget, the Administration also wants to raise a further $208 billion by limiting itemized deductions for these same taxpayers.
As if this weren’t enough, the Diamond-Orszag “legacy tax” proposal is still under consideration. It was favorably cited in a recent report by the National Committee on Social Insurance. And the Senate Committee on Aging more recently followed up with a report suggesting that the “legacy tax” is an option that should remain on the table. According to data from the Social Security Administration, this surcharge would amount to more than $350 billion in new taxes over the next decade.
Even this is an incomplete list. The Administration’s proposed tax and budget policies, according to both OMB and CBO, would leave the federal budget on an unsustainable course. To deal with this, the Administration has convened a fiscal responsibility commission, which some are hoping will provide cover for – you guessed it – still higher taxes.
Margaret Thatcher once famously said that the trouble with such policies is that “eventually you run out of other people’s money.” The Administration and Congress apparently believe that “the rich” are an inexhaustible political resource; only those same policy makers can know whether “the rich” are similarly regarded as an inexhaustible tax resource.
But the record is clear: the determination to apply higher taxes has been pursued relentlessly on many fronts over the past decade – employing every lever from the Social Security payroll tax, to the Medicare payroll tax, to income tax rates, to limiting itemized deductions. Where new taxes have been enacted, the new money has been spent. As long as this Congress and Administration control federal policy, it’s clear that it is a very long way from being over.
