Where Is the Money for Budget Reform Going to Come From?

Another interesting post from Howard Gleckman at the Tax Policy Center shows that for President Obama to steer us towards fiscal balance in 2020 while upholding his various pledges (not to raise taxes for people making $200,000 or less, not raising corporate income tax, and making 2/3 of deficit reduction through spending cuts), he would have to raise taxes on the country’s wealthiest taxpayers to politically impossible levels.

If Washington is going to need new tax revenues to bring the deficit under control—which it inevitably will— I increasingly wonder where the cash is going to come from. If you listen to what President Obama has been saying in recent days, it appears that while corporations and nearly all individuals and families would avoid any tax hit at all, a handful of high-income households would get socked with major increases.

These tax hikes would be so big, in fact, that top-bracket taxpayers might end up paying a rate of 67 percent on ordinary income and nearly 50 percent on capital gains.

Though Gleckman, whose view on tax policy puts him solidly on the left, tosses in a crack about these taxpayers “doing quite well”, his broader point is extremely valuable. Progressives should not delude themselves into thinking that Obama will be able to slay the deficit by pillorying the rich with a 67 percent marginal tax rate, almost double what the highest rate is now. He also correctly notes that such a tax would pound “nearly one million successful businesses” who pay tax on their business income through their personal return.

Since the Administration’s goal is not fiscal balance but a “stable” budget deficit of about 3% of GDP, this is all somewhat moot. But it highlights the difficulty the President is going to have in keeping his promises to everyone on budget reform. So where is the money going to come from? I’ve already noted the trepidation that the Administration has shown on meaningful spending cuts (read: in entitlements) in this budget.

And while Obama praised the sacrifice of “patriotic” federal workers for whom he proposed a 2 year pay freeze, his support for Wisconsin’s public employee unions in their fight to maintain their various privileges suggests his willingness to make other substantial changes in the size of government may not be up to the task.

Gleckman’s question is a good one: where is the money for reform going to come from? It’s not going to be from tax hikes on the rich… at least not as much as the President’s promises might suggest.