Let the tax cuts expire
So, 4.6%. Now, I don't particularly like the idea of paying higher taxes, but if I saw my taxes go from 4.6% to 6%, for example, it would have no noticeable impact whatsoever on my standard of living. I think I spend more than 1.6% of my income on coffee anyway.
Similarly, if my taxes were cut to zero, that would also have no noticeable impact on my standard of living -- ignoring, for a moment, the impact this would have on state and federal services.
Of course, things would look a little different if I earned more, which is the genius of marginal tax rates. Most of the time, people think about taxes in terms of their total "tax burden," but that is a very childish way to look at it. The first big chunk of your income is essentially tax-free, and is supposed to be big enough to meet your basic needs. The reason I only pay 4.6% is because I don't earn much more than what I need to cover my basic needs -- as you would expect for a graduate student salary. If it were too comfortable, people would never graduate, but if it was significantly lower, recruiting students would be impossible.
After that first chunk of income (about $10,000 in my case), there is another chunk of money that is taxed at the lowest rate, and then another chunk at a higher rate, and so on. Here's what it looks like :
Red : Adjusted median income for women with a bachelor's degree
Blue : Adjusted median income for men with a bachelor's degree
It's sad, but the median personal income for men with a bachelor's degree is about $20,000 more than women. My own income is about $20,000 less than the median income for women with a bachelor's degree. It would be nice if both of those problems were solved...
As you can see, the medians are about an order of magnitude below the top bracket, and my own income is almost two orders of magnitude away. The Bush tax cuts are overwhelmingly aimed at the top three brackets. What most people are probably not aware of is just how few Americans are in those tax brackets.
What would happen if the tax cuts expire? Well, for me, and for most Americans, not very much. My taxes would go up about by about half a percent, which at my income isn't even enough for a cup of coffee a day. As far as my own interests, I don't care.
At the median income, most people would be looking at a tax increase of between zero and three percent, depending on deductions. The biggest worry is that this might "push people over the edge" into defaulting on their mortgages. This is very unlikely -- if your mortgage is large relative to your income, then so is your deduction for the mortgage interest. The people who are "near the edge" will be affected the least, if at all.
The second concern is that raising people's taxes will "hurt the economy," presumably because people will spend less. The small-ish increase in marginal tax rates for the overwhelming majority of Americans is much more likely to impact saving rates than spending rates. Most households have already cut their spending as much as they're willing to, which is part of the reason the economy continues to suck.
At this particular moment in history, the most likely result of raising taxes would be to increase investment. Why? Because investment is all about the balance between fear and greed, and right now fear is running the show. For investors and businesses, slightly higher taxes would mean slightly lower profits today, but would mean brighter prospects for the future than are anticipated under current circumstances. With the Bush tax cuts in place, our government is in very bad fiscal shape. Leaving them in place for much longer would do permanent, long-term damage to our prospects as a leading economy. Stabilizing the federal budget -- even if it means lower profits today -- would have a salutatory effect on business and investment.
Many people firmly believe spending is the problem, and that we should balance the budget by cutting it. This is mathematically true and economically false without major, mostly negative changes to social and foreign policy. Being a world power costs money, and there's no way around that fact. Investors understand this perfectly, even if the pundits don't.
What about people above the median? Personally, as a matter of policy I don't think it makes sense to worry about them very much. People earning $100,000 or more will be absolutely fine, regardless of any tinkering with marginal tax rates. We could set the top three brackets to 100%, and nobody in America would experience anything that could be mistaken for actual hardship. That isn't to say that those fortunate few would be happy, but nobody is going to starve on $171,850 a year. Raising the top three income brackets by less than five percent will have a negligible impact on the lives of those who enjoy the good fortune to earn enough to be affected. It will have a huge, entirely positive effect on financial stability of the United States of America.
What angers me, and a lot of people who care about the future of this country, is what these tax cuts have done to the federal budget. When Bill Clinton left office, the government was running a surplus. The TV pundits and op-ed colonists have insisted on saying, over and over, that Congress has been "spending like drunken sailors." (An expression that I find rather insulting, to tell the truth. I know a few people in the US Navy, and they spend most of their time worrying about making payments on their used cars.) In fact, we would be looking at a return to surpluses once the economy recovers, were it not for two factors :
- The wars in Iraq and Afghanistan
- The Bush tax cuts
Wars and tax cuts got us into this mess. Pure and simple.
The necessity of the war spending is debatable, but the necessity of the tax cuts is not. They are a useless giveaway to people who already have enough.
Nobody is going to be totally happy with every aspect of federal spending, but don't you dare call yourself a fiscal conservative unless you are willing to do you part to insure that the government can cover its expenses. It's your goddamned government, like it or not.