Almost every word that emerges from the camps of Mitt Romney and Barack Obama must be filtered through the prism of campaign tactics. Yet there also are moments when a candidate lands on a defining issue, for the contest and the country. On Monday, President Obama did just that in proposing a one-year extension of the Bush-era tax cuts for those households with annual incomes below $250,000. That translates into a tax increase for those households above the threshold, or 2 percent of taxpayers.
The Bush tax cuts are set to expire at year’s end, along with other measures promising a substantial impact on the country’s finances. The president’s proposal is nothing new. It dates to the last campaign. What remains true is that if the country is going to tackle its deficit problem during the next decade, it must increase taxes as part of a balanced approach. And a smart place to turn for additional revenue are the households that have fared well the past two decades, their incomes rising sharply compared to the stagnant incomes of others.
The top marginal tax rate for those households at $250,000 and above has declined dramatically since 1980, from roughly 60 percent (in real dollars) to 35 percent today. The president proposes taking the rate to 39.6 percent, or an additional 4.6 cents on every dollar above $250,000. That hardly presents an unacceptable burden. The rate would return to the level of the prosperous Clinton years.
The Romney campaign responded predictably, arguing its candidate “understands that the last thing we need to do in this economy is to raise taxes on anyone.” Yes, the economy is fragile, and would benefit from another strong dose of stimulus. Yet Romney also points to the importance of dealing with the deficit, even as he proposes additional tax cuts and increased defense spending.
What the evidence shows is that a modest tax increase at the upper income levels poses little harm to the economy, the impact minimal to consumer spending and private investment. What about small business? Again, the evidence reveals that just 2.5 percent of small business owners fall into top two income tax brackets, and they account for less than one-third of small business income.
More, the evidence just doesn’t show that tax breaks for small businesses (minus start-ups) trigger growth and job creation. If anything, a failure to raise sufficient revenue for public investment, in such areas as education, research and public works, diminishes growth and jobs.
All of this isn’t to cast aside the role of spending reductions. They are essential, too, especially in the area of entitlement programs, their size crowding key priorities. Yet this actually is an area of agreement. What the president proposes is a realistic balancing of needs. He presents the making of a compromise, of real governing — something worth emphasis in this election year.