Opinion, Berkeley Blogs

Taxing the rich, the Obama way

By Robert Reich

Warren Buffett is a tough negotiator, which is one reason why hes the second-wealthiest person in America.

So when the President refers to his new initiative to raise taxes on millionaires as the Buffett rule wemight expect hed start the bargaining from a tough position.

But this is Barack Obama, whose idea of negotiating is to give away half the house before hes even asked the other side for the bathroom sink.

Apparently Obama will propose that people earning more than $1 million a year pay at least the same tax rate as middle-class earners. Thats aiming mighty low.

Americas median income is about $50,000. The typical taxpayer at that level pays approximately 20 percent in taxes.

Granted, thats a higher rate than most of todays super rich pay because of countless deductions, credits, and loopholes including, especially, their ability to take their incomes in the form of capital gains, taxed at 15 percent. Thats a big reason Buffetts hundreds of millions a year are taxed at just over 17 percent a lower rate than his secretary faces, as Buffett often says.

But a 20 percent rate is still ridiculously low compared to what millionaires and billionaires ought to be paying. Officially, income over $379,150 is supposed to be taxed at 35%.

And even 35 percent is a pittance compared to the first three decades after World War II. Before Ronald Reagan slashed taxes on the rich in 1981, the highest marginal tax rate was over 70 percent. Under Dwight Eisenhower it was 91 percent. Even if you include deductions and credits, the rich are now paying a far lower share of their incomes in taxes than at any time since World War II.

The estate tax (which only hits the top 2 percent) has also been slashed. In 2000 it was 55 percent and kicked in after $1 million. Today its 35 percent and kicks in at $5 million. Capital gains comprising most of the income of the super-rich were taxed at 35 percent in the late 1980s. Theyre now taxed at 15 percent.

Meanwhile, the top 1 percents share of national income has doubled over the past three decades (from 10 percent in 1981 to well over 20 percent now). The richest one-tenth of 1 percents share has tripled. And theyre doing better than ever. The last time the top 1 percent got that much was in the roaring 1920s.

So much money is now concentrated at the top that what we really need are more tax brackets at the high end, higher marginal rates in each bracket, and a tax code that treats all sources of income whether ordinary or capital gains the same.

The marginal tax rate ought to be raised to 50 percent on income between $500,000 and $5 million, 60 percent on income between $5 million and $15 million, and 70 percent on income over $15 million.

In light of our history, and in the face of future budget deficits that will otherwise cause taxes to be raised on the middle class and government services to be sliced, this is the least we should expect from the richest among us.

Why shouldnt the President be calling for this, instead of asking that millionaires and billionaires pay at a rate average earners pay?

At least begin from a tough negotiating position, Mr. President. You might as well. Congressional Republicans will oppose any tax increases on the wealthy, whom they call job creators even though big companies are sitting on more than $2 trillion in cash and arent creating any jobs at all, while 99 percent small-business owners, who account for most new jobs, make under a million dollars a year. (GOP Budget chief Paul Ryan has already accused the President of waging class warfare with his millionaire tax plan.)

And you can also bet Republicans, as well as their allies on the editorial page of the Wall Street Journal, will continue to harp about thelarge portion of low-wage earners who pay no income taxes without mentioning that they pay a higher portion of their incomes than anyone else in payroll and sales taxes.

Besides, the public supports raising taxes on the rich. (In an August CBS News/New York Times survey, 63% of respondents favored increasing taxes onhouseholds earning more than $250,000 a year to help close the budget deficit.)

We dont yet know the details of the Presidents proposal. The White House hasnt said what the minimum rate on millionaires will be, or how theyll define a middle class income. Maybe hell surprise us by starting out much higher and tougher.

I hope so. But as hes proven time and time again, when it comes to negotiating Barack Obama is no Warren Buffett.

Cross-posted fromRobert Reichs blog.