Washington Post Columnist Calls Tax Deal “A Pathetic Punt”

In my last blog I wrote that the recent tax deal will not raise much new revenue over ten years and will permanently enshrine most of the Bush tax cuts. The Washington Post columnist, Ruth Marcus, has a take on the deal which I find very compelling.

Marcus labels the deal “a pathetic punt,” because it fails to produce “anywhere near” enough tax revenue; locks in the Bush tax cuts for nearly everyone; puts in place low rates for capital gains and dividends; and results in a “gallingly generous government estate tax break.” Also, Marcus notes that the deal does nothing about spending. Prsident Obama had promised to veto any attempt to cancel the sequestration deal agreed to by Democratic and Republican lawmakers, and he said there would be no easy off-ramp on sequestration, yet, as Marcus points out, Obama has agreed to a two-month delay in negotiations. Most importantly, Marcus believes that Obama has reduced his leverage to extract new taxes, and, in contrast, the Republicans have increased their leverage to extract painful entitlement cuts.

I agree with Ruth Marcus that imposing a relatively modest tax increase on one percent or less of all taxpayers may be perceived as a symbolic victory for Obama but will do little to meet spending needs or seriously attack the deficit. I believe it is also a big mistake to embed in the public psyche the notion that the top marginal tax rate can’t be over 39.6 percent. Obama and Democratic lawmakers can’t seem to grasp the reality that undertaxing doesn’t affect only the top one or two percent of taxpayers. Wealth concentration fits the following pattern: the top one percent owns about 30 percent of the nation’s wealth; the top five percent owns a little over 60 percent; and the top 20 percent owns a little over 80 percent. The earned income gap is not as pronounced as the wealth gap; however, what it portends for the income tax structure is that to adequately tax earned income based on its distribution, it is necessary to have a robust rate structure, with a top marginal tax rate of 60 to 70 percent. The first three decades after World War II was a period of enormous economic prosperity, yet the top marginal tax rate was never lower than 70.45 percent.

56.2 percent of the Bush tax cuts went to the top five percent of taxpayers. Yet, except for the top one percent or less of taxpayers, all others in the top five percent bracket will retain their Bush tax cuts based on the “fiscal cliff” tax deal. For instance, a couple with $450,000 in taxable income will receive a tax break of $9,200 than if the 39.6 percent threshold had been set at $250,000.

As for the estate tax, which Ruth Marcus calls “gallingly generous,” in 2011, about 1,800 taxpayers died leaving estates of more than $10 million. Although the statuary tax rate was 35 percent and the average gross value of the estates was $65 million, the average tax actually paid was 16.2 percent. By returning to the 2009 law, the tax would have been 45 percent on estates of over $7 million. By paying a lower tax rate on estates of higher monetary value, the super-wealthy get another tax break in the new tax structure recently signed into law.

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