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Tax the Rich ... First

A Commentary By Froma Harrop

Thursday, March 01, 2012

We who've been going on and on about the need to raise taxes on the rich need to catch our breath. There's no need to reverse course, but also no obligation to totally love President Obama's approach for doing what we've been asking for. An explanation is in order.

One may brush off the usual charges of "class warfare" that follow any proposal to hike taxes on the affluent. But President Obama does not improve the atmospherics by constantly telling the public, "This is about them, not about you."

The Bush-era tax cuts have been disastrous for America's fiscal standing. The 2001 and 2003 tax cuts piled more than $1.7 trillion onto the deficit over 10 years, according to the Center for Budget and Policy Priorities. The two-year extension pushed by Obama will add another $858 billion.

Obama's budget would end the Bush tax cuts for those with incomes of $250,000 and up. That's fine, but an honest conversation with the masses is in order. It should focus on two realities: One is that the Bush tax cuts favored the rich royally, so ending them for everyone does hit the well-to-do more than we lesser taxpayers. The other is that the added revenues from just raising taxes on the top incomes would not close the deficits, even with big spending cuts.

Obama also proposes taxing rich people's dividends as ordinary income, which is to say at the highest marginal rate (to be 39.6 percent next year if it goes back to pre-2001 levels). That's also fine. Dividends were taxed as ordinary income when Ronald Reagan left office. In the George W. Bush years, the rate was lowered to 15 percent.

But why further complicate the tax code with different rules for different income groups? If we want to treat dividends as ordinary income, let's treat everyone's dividends as ordinary income. People who are not wealthy would end up paying less than those with top incomes, anyway.

Meanwhile, we can ignore the beef that dividend taxes are a tax on corporate profits that have already been taxed. For starters, many companies pay little if any of that corporate tax due to an arsenal of loopholes. Furthermore, the property or sales taxes we pay comes out of earnings that have already been subject to income taxes. The system is riddled with so-called double taxation.

At some point, Americans will have to engage in a grown-up discussion about a value-added tax, which is a kind of national sales tax. Critics on the right complain that it's a sneaky way to fund government programs. Critics on the left grumble that it is regressive: It doesn't distinguish between rich and poor shoppers.

To the left we say, if it funds government programs for the middle-class on down, its end results are progressive. That's how Europe pays for its social safety net.

To the right we say, the VAT is a tax on consumption, not investment. That's how your hero Margaret Thatcher pulled off cutting income taxes without bankrupting Britain. As prime minister in the early 1980s, Thatcher raised the VAT to 15 percent from two rates of 8 percent and 12.5 percent.

Expecting Obama to share stern truths before the November election may be unrealistic. And getting a useful conversation going among Republican candidates -- all of whom say they'd refuse $10 of spending cuts for $1 of new taxes -- is impossible.

But one can hope that Obama will at least launch us on some baby steps toward understanding what must be done -- considering a VAT, for example. And when talking about higher taxes, rather than saying "for the rich only," he should say, "The rich come first."

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