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Tax Jujitsu: Why Democrats should propose a ‘People’s Tax Cut’

Robert Reich, professor of public policy | August 24, 2010

Republicans are calling the Democrat’s proposal to end the Bush tax cuts on the richest 3 percent a “tax increase,” and demagoging that it will hurt the economy and small business. This is baloney, to put it politely. Let me count the ways:

– Bush’s ten-year tax cut was designed to end this year, so it’s not a tax increase.

– Ending it for the rich simply returns them to the Clinton tax rate, which was hardly confiscatory (reminder: the Clinton years were damn good for business).

– Small businesses would barely be affected. Only 3 percent of small business owners earn over $250,000. And because it’s a “marginal” tax, the Clinton rate would apply only to the portion of their incomes over $250,000.

– Yet extending the Bush tax cut to the richest Americans would give them a $36 billion bonus next year. ($31 billion of this would go to billionaire households.) And that $36 billion would be added to the budget deficit.

– And it wouldn’t even stimulate demand and jobs, because the very rich save (rather than spend) more of their disposable income than the rest of us.

– Finally, ending the Bush tax cut for the top is fair. Income inequality has become so grotesque that the top 3 percent of households rake in almost a third of total income (the highest portion since 1928).

But by the time Democrats explain all this, it’s too late. The Republican furor over a “tax increase” has framed the debate.

Republicans understand the art of tax demagoguery: Put the other side on the defensive by forcing them to explain why a “tax increase” is warranted and they lose regardless.

So instead of playing defense, Democrats should go on the attack.

Accuse Republicans of being shills for the rich.

And don’t stop there. Do tax jujitsu. In addition to ending the Bush tax cut for the rich, put forward another proposal for growing the economy that cuts taxes on lower-income Americans.

Democrats should propose eliminating payroll taxes on the first $20,000 of income, and making up the revenue loss by applying payroll taxes to incomes above $250,000.

This would give the economy an immediate boost by adding to the paychecks of just about every working American. 80 percent of Americans pay more in payroll taxes than they do in income taxes. And because lower-income people would get most of the benefit, it’s likely to be spent.

It would also give employers an extra incentive to hire because they’d save on their share of the payroll tax. And most of the incentive would be directed toward hiring lower-income workers – who have taken the biggest hit on jobs and pay during the recession.

It wouldn’t add to the deficit. Lost revenues would be made up by applying payroll taxes to income exceeding $250,000. This is certainly fair. As it is now, the Social Security payroll tax doesn’t apply to any income over $106,000. Having the tax kick in again at $250,000 would draw on the top 3 percent of earners, who (as noted) now rake in a larger portion of total income than they have in more than 80 years.

Call it the People’s Tax Cut, and let Republicans explain why they’re against it.

Cross posted from Robert Reich’s blog.

Comments to “Tax Jujitsu: Why Democrats should propose a ‘People’s Tax Cut’

  1. Professor Reich:
    Given your education, experience, and common sense as reflected in your postings, why are you not running for the position of president of the USA?

    You seem to understand that our society is not composed for the purpose of enriching a certain group of elites with the remainder fighting over the crumbs that may fall from their tables.

    There has been a significant amount of unhappiness relative to Obama’s inexperience and penchant for trying to develop policy and move society forward on the basis of consensus; a consensus where one party refuses to make while the other party makes all the significant concessions at the risk of totally alienating its base of supporters. Sadly Obama does not have the requisite leadership skills or understanding as a democrat or a progressive of the purpose of a ‘society’ to justify his continuation as president.

    It appears on the surface of your writings that you do understand what this society is about and that its priorities are totally screwed up. What do the majority of our society receive from the relationship as the USA? Perhaps as individual states acting separately the needs of the majority will be met.

  2. Prof Reich, impresive figures you posted here, really justifies why we really need a change in the tax structure.

    yes, hopefully all these injustice will end after 2010 ends too. And hopefully the Obama office could justify why this change is completely reasonable and have to be implemented to the republicans; especially in a time like this.

    Lastly, how significantly this idea would affect the elections would have to be made out.

  3. I don’t understand why the Dems are not calling for imposing a range of higher marginal tax rates for people who make much more than $250,000. We should not be taxing people who make $1 M or $ 2 M or $5M or $10 – or $25 M a year the same way we tax people who make $250,000. $250,000 was rich back in 1950. But not any more! Of course, high taxes on a a relative small number of very rich, high earning people won’t balance the budget, but that is not the point. We need to make taxation more fair.

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