Tax Analysts Blog

Soak the Rich, GOP-style

Posted on Mar 23, 2012

How badly do some Republicans want a balanced budget requirement? So much that they're willing to sacrifice one of their party's signature issues in exchange for it. Namely, a tax hike on the super rich.

Here are the details. Rick Crawford (R-Arkansas) is a freshman House member who thinks America's chronic deficit is among our country's most pressing problems. He's right about that, by the way. Crawford favors a balanced budget requirement, but he knows most Democrats will never go along with the idea in isolation. Thus the need for a legislative sweetener; something that will make those on the other side of the aisle sit up and take note. What better than a 5% surtax on annual incomes over $1 million dollars?

That trade-off is the concept behind the "Shared Responsibility in Preserving America's Future Act," which Crawford introduced last week. You can see his press release by clicking here.

Crawford doesn't specify what the numerical tax rate on millionaires would be, and he doesn't need to. The 5% surtax would be layered on top of prevailing tax rates, whatever those rates happen to be. So the surtax would apply regardless of whether the Bush-era tax cuts expire on January 1, 2013. Nor does Crawford specify how Congress would balance the budget once compelled to do so. Again he doesn't need to, the point is the mandate.

As we all know, a millionaire tax is music to the ears of the Occupy Wall Street movement. And balancing the federal budget is nirvana to the Tea Party. So, has Crawford done the unimaginable and bridged the opposite ends of Washington's partisan divide?

Not likely. But at least the Congressman has done something. There's a whiff of compromise in his idea, and Washington needs a lot more of that. His plan includes an overt tax increase and therefore violates the established GOP credo. That deserves a nod for independent thinking. And there's no indication Crawford is worried about accusations of 'job-killing' tax hikes. That's equally refreshing.

There is one obvious snag, however, which Democrats have already latched on to. Not very many people have taxable incomes in excess of $1 million. The amount of revenue the surtax would rake in is minimal compared to the magnitude of other changes the plan would bring about. Given the likely effect on social programs, the tax sweetener falls short in the eyes of progressives.

Balancing the budget is an admirable goal, but the changes it would bring to our system of government are quite sobering. Let's briefly examine some figures. Federal spending is somewhere around 24% of GDP. (That number was closer to 19% before we bailed out the financial sector and went to war in Iraq and Afghanistan.) Federal tax revenues are somewhere around 15% of GDP. (That number also was closer to 19% before we cut individual taxes a decade ago and allowed the corporate tax base to gradually erode).

The challenge of equalizing those two figures -- total spending and total revenue -- can not be underestimated. The math is easy, the problem is lack of political buy-in. Members of Congress don't want to be forced into making painful decisions. They go to extreme lengths to avoid being trapped in such awkward positions, even though it's part of the job they signed up for. That's equally true for Democrats and Republicans.

Just look at the recent supercommittee adventure. It took a manufactured crisis (the debt-ceiling deadline) to create the supercommittee in the first place. And once the outcome was clear, lawmakers immediately started talking about nullifying the sequesters -- thereby undoing the budgetary savings, which was the point of the whole exercise. On reflection, our representative democracy stumbled and sputtered through that process. Yet he pain of balancing the budget will be many times worse than what the supercommittee had to deal with. Frankly I'm not sure Washington is up to the task.

The available options for balancing the budget are well established: cut entitlements, cut the military, raise taxes. Each of these alternatives is politically toxic, explaining why we don't already have a balance budget requirement.

Anybody else remember the Gramm-Rudman budget laws from the 1980s? There's a reason those rules were allowed to expire. Congress hated them. But that's probably Crawford's point; maybe they're suppose to hate it.

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