Who Ate the Dessert?: Deficit Mania Ignores Growth of Income Gap

No sooner had the unemployment rate dipped from its January high of
10 percent than the media drumbeat began: What will the Obama
administration do about looming deficits?

The danger, it was made clear, was both imminent and mammoth: The
federal deficit, warned the New York Times
(2/2/10), was on pace by 2020 to "equal 77 percent of the gross
domestic product, the highest level since 1950." The Times (1/26/10) even alluded to "perceptions
that government spending is out of control" as a cause of Obama's
falling poll ratings among independents.

The "out-of-control spending" theme, in fact, dominated news coverage of
the deficit panic, with numerous news outlets drawing parallels between
the government's rising debt and individuals' irresponsible spending.
"We're going to talk, this morning, about what happens when you put off
paying the bills," began an NPR report
(3/5/10) on the deficit.

CNN Your Money host Ali Velshi
(2/13/10) declared:

We begin today by examining when debt becomes dangerous. For your
personal debt, we'll show you exactly what the new credit card rules
will mean to you, but first we want to look at what it means for the
United States to be spending trillions of dollars that it doesn't have.

Velshi then brought on U.S. News'
David Gergen to observe that "the deficits that are out there are just
gigantic" and "recent projections show that the United States will never
balance its budget on the course we're on."

Gergen was not alone. Pundits from center-left to the right wing-the
standard spread available from most news outlets, in other
words-insisted that pain was necessary, and must be shared by the
less-than-wealthy. Michael Kinsley (Atlantic
Monthly, 4/10) griped about the stimulus package: "This cure has
been one ice-cream sundae after another. It can't be that easy, can it?
The puritan in me says that there has to be some pain."

Isabel Sawhill, a Brookings Institution economist and former Clinton
administration budget staffer, wrote in the Washington
Post (2/12/10): "From 2001 to 2003, Congress reduced taxes for
just about everyone....The message to the public would be simple: If you
want to keep taxes low, you have to forgo some benefits. As my parents
used to say, no dessert without the spinach."

What very few news outlets mentioned,
however, was exactly who had eaten the dessert. Most coverage blamed
overall "spending"-and particularly benefit programs like Social
Security-for the nation's deficit woes (Extra!,
4/10). But as the Center on Budget and Policy Priorities pointed out in
a February report (2/17/10), "the tax cuts enacted under President
George W. Bush, the wars in Afghanistan and Iraq, and the economic
downturn together explain virtually the entire deficit over the next 10
years."

Tax and income records show, meanwhile, that the beneficiaries of
Washington's spendthrift ways have been very few-and very wealthy. As
Berkeley economist Emmanuel Saez has documented ("Striking It Richer,"
8/5/09), income inequality in the United States has skyrocketed in
recent decades. After remaining steady for roughly 40 years, the share
of the nation's total income going to top earners began a steady rise in
the early 1980s. When President Ronald Reagan first took office, the
top 10 percent of earners captured about one-third of all U.S. income;
by 2007, the latest year for which data is available, they took home
nearly half-"a level," writes Saez, "higher than any other year since
1917...even surpass[ing] 1928, the peak of the stock market bubble in
the 'roaring' 1920s."

What happened in the early '80s? For one thing, Reagan slashed the
marginal tax rate on top earners, from 70 percent to as low as 28
percent. This not only allowed the rich to keep more of their earnings,
it also increased their incentive to demand higher salaries, which, Saez
notes, have soared in the last 25 years.

As a result, according to Wealth for the Common Good-a group of wealthy
Americans supporting more progressive tax rates that's affiliated with
the Institute for Policy Studies-the top 0.1 percent of U.S. taxpayers
saw their average share of income paid in federal taxes drop from 60 to
33.6 percent between 1960 and 2004. The group notes that if those
taxpayers (who make more than $7 million a year in income) paid federal
income taxes at 1960 rates, the government would get $281 billion more a
year in revenue.

The effects of tax policy on income inequality were particularly stark
during the George W. Bush administration, when the incomes of the top 1
percent of earners grew by 10.1 percent a year, while everyone else saw
their earnings increase only 1.3 percent a year-with the result that
two-thirds of all income growth between 2002 and 2007 went to the
nation's richest 1 percent (Saez, 2009). The Bush tax cuts reduced
federal government by about $2.1 trillion (Citizens for Tax Justice,
9/8/09), almost half of which padded the bank accounts of the nation's
richest 5 percent.

The changes in tax policy under Bush had stark effects on racial
inequality as well. From 2000 to 2008, according to Census data, the gap
between the average income of black U.S. taxpayers and white
non-Hispanics, which had fallen by 6 percentage points during the
Clinton years, reversed course and grew from 27 percent to 29 percent.

One obvious solution, it would seem,
would be to tax those responsible for eating most of the cookies from
the jar-to roll back the deficit by taking back the money that was
handed over to the rich over the last three decades. But much media
coverage in recent months has been devoted to finding reasons why this
would be impossible.

First off, many outlets argued, the rich are already overtaxed. When
President Obama floated repealing the Bush tax cuts-actually just
allowing them to expire as scheduled for all earners above $200,000-USA Today wrote (4/7/10), "Fresh from
raising taxes on upper-income Americans to help expand health insurance
coverage, President Obama and Democratic lawmakers are targeting them
again."

In an article headlined "Obama Sets Sights on Rich to Fuel Agenda," the Los Angeles Times (4/7/10) wrote, "for
upper-income taxpayers, the tab for healthcare is just the beginning."

"Rich Lack Loopholes to Offset Obama Taxes," warned a Bloomberg News headline (4/8/10), citing
supply-side economics guru Arthur Laffer as threatening that "some
taxpayers paying top rates may respond to mounting federal and state
levies by moving, like he did." (Laffer moved from California to
Tennessee in 2006, he says, to escape high state income tax rates.)

Since, historically speaking, the current top tax rates are relatively
low-and still will be even if the Bush tax cuts are allowed to expire
next year-arguments that the rich are overtaxed often rely on tricky
mathematical gymnastics. "Despite all the complaints-which were mostly
fair-that the Bush tax cuts disproportionately favored the rich, the
share of federal income taxes paid by the wealthy continues to
rise,"Alan Greenblatt declared on NPR
on tax day (4/15/10). But that's because their income continues to rise
as well, even as taxes as a proportion of their income have fallen. The
share of federal income taxes paid by the richest 1 percent of earners
went from 31 percent to 39 percent between 1996 and 2006, according to
the Congressional Budget Office (4/09), an increase of just under
one-quarter; at the same time, the richest 1 percent's share of total
income went from 14 percent to 19 percent, a jump of more than
one-third.

Still, media argue, hitting the middle and working classes needs to be
the centerpiece of balancing the budget. The New
York Times (2/2/10) cited "many budget analysts" as believing
that Obama's pledge not to raise taxes on households making less than
$250,000 was "a big hurdle to significant deficit reduction." The Times criticized the president for avoiding
the "really hard choices about entitlement programs-Medicare and
Medicaid, especially-and about taxes that most budget analysts say are
essential to cut annual deficits and to begin paying down an accumulated
debt."

"Taxes on the rich can't begin to finance the levels of new spending
that the current government has unleashed," wrote the Wall Street Journal editorial page (4/8/10).
"Democrats have to soak the middle class because that's where the real
money is."

In fact, tax experts say that the
deficit could be significantly reduced by taxing only the rich-it would
just take very high tax rates, something that is much more popular with
the public than with corporate media. A March 2010 Quinnipiac poll found
that 60 percent of Americans support raising taxes on those earning
more than $250,000 to reduce the deficit (USA
Today, 4/7/10), while 72 percent, including a majority of
Republicans, support higher taxes on those making more than $1 million.

CBS's MoneyWatch.com
(4/7/10), though, scoffed that taxing the rich is "always a popular
idea, but the math doesn't add up." The program argued that a national
value-added tax (effectively a national sales tax) would be necessary,
since "top tax rates are already likely to go up to almost 40 percent."
Raising taxes only on individuals making more than $200,000 and couples
making more than $250,000 would mean the top rate would need to hit 77
percent, something the Tax Policy Center's Roberton Williams and Rosanne
Altshule, writing in the Washington Post
(4/4/10), called "politically untenable."

But even at "almost 40 percent," the top tax rate would still be fairly
low by historic standards. Wealth for the Common Good (4/7/10) wrote:
"The tax shift we have witnessed since the 1950s has been enormous. From
1950 through 1963, the federal tax rate on ordinary personal income
over $400,000 never dropped below 91 percent. Between 1963 and 1980,
that same top rate never dropped below 70 percent." The capital gains
tax rate, meanwhile, which is what applies to much of the income of the
nation's wealthy, fell to 15 percent in 2003, after reaching nearly 40
percent in 1977.

Occasionally, this sort of nuance sneaks into media coverage. In an
article on the passage of the health reform bill (3/24/10), for example,
Times business columnist David
Leonhardt wrote that

over most of [the last three decades],
government policy and market forces have been moving in the same
direction, both increasing inequality. The pretax incomes of the wealthy
have soared since the late 1970s, while their tax rates have fallen
more than rates for the middle class and poor.

Yet a week earlier (3/17/10), discussing the deficit, Leonhardt wrote
that taxes "are no longer rising," yet "our desire for government
services just keeps growing." Leonhardt called this disconnect "far and
away the main reason for our huge budget problems"-calling the wars in
Afghanistan and Iraq, recession and stimulus "minor issues in the long
run." As for the Bush tax cuts and the concurrent redistribution of
income to the wealthy, they aren't even on the list of culprits.

Leonhardt's conclusion: "Spending will need to be cut, and taxes will
need to rise. They won't need to rise just on households making more
than $250,000, as Mr. Obama has suggested. They will probably need to
rise on your household, however much you make." He also called for a
"modest consumption tax [that] would give households more incentive to
save and could raise significant revenue."

In other words, the rich are too rich, but closing the budget hole by
taxing them isn't the answer.