An Economic Perspective: Tax the rich

You may have noticed the lack of talk about the success of the December $858 billion tax deal from either President Barack Obama or the Republican Party. Instead, the conversation has drifted towards deficit reduction. The wave of Tea Party-friendly freshman members of Congress recently succeeded in persuading GOP leadership to vote for $100 billion in spending cuts for this year, far more than the $35 billion that Republicans were initially prepared to support. That's a great start, Congress, but you still have another $758 billion to cut before you pay for that tax cut deal you won in December.

The problem I have with discussion of deficit reduction is that it usually arises in conjunction with the topic of lowering taxes. Tax cuts aren't necessarily a bad thing – they can have stimulating effects on the economy – but when the government receives fewer tax dollars to run programs, the deficit increases. Any conversations about tax cuts should involve how cost-effective such cuts are.

The non-partisan Congressional Budget Office estimates that income tax cuts only increase gross domestic product by 40 cents per dollar spent. This can be explained simply: Income tax cuts favor wealthy households that spend a smaller percentage of their income than middle and lower class households. A far more cost-effective measure would be to invest in infrastructure, which is estimated to increase GDP by $1.20 per dollar spent. Infrastructure investment is the very thing that the GOP has been railing against.

There hasn't been much promotion of the December tax deal from either side because, well, it hasn't worked as expected yet. Unemployment has fallen to nine percent, but that isn't as encouraging as it first appears because much of the drop can be attributed to workers leaving the labor force completely. People that leave the labor force are no longer considered unemployed for the purposes of calculating the unemployment rate, so the drop in the rate might actually be a sign that workers are getting more discouraged about employment prospects, not less so.

It would be irresponsible to label the tax cut deal a failure this early, as there have been some encouraging economic signs of future growth. The problem is that these new tax cuts will cost an estimated $858 billion ($71 billion more than the stimulus), meaning that Congress will have to find an additional $758 billion in spending cuts over the next ten years just to keep the deficit at its current level.

The deficit is out of control, and both Congress and Obama will need to start identifying tough spending cuts to combat the problem. At the same time, it is hypocritical to call for spending cuts while refusing tax increases for the wealthy. Under the current tax code, Warren Buffet – the third wealthiest person in the world – pays only 15 percent in federal taxes, less than many middle class taxpayers, because his wealth comes from capital gains. Wouldn't it be fiscally responsible to consider raising that tax rate for the very wealthy?u

This article is the work of the Economics Society and reflects the views of its author. The views of the Economics Society are not necessarily represented in this article's content.