Raising taxes on the wealthiest Americans, as President Barack Obama proposes to do, probably wouldn't wreck the moribund U.S. economy, but extending the tax cuts they've enjoyed since 2001 could spur some economic benefit.
A healthy dose of "it depends" is needed when assessing the economic merits of whether to collect more taxes from the rich.
Congress returns next week to begin debating whether to extend some or all of the tax cuts from 2001 and 2003 legislation that President George W. Bush signed into law. These temporary reductions in income, capital-gains and investment-dividend taxes are to return to the previous rates unless Congress extends them by year's end.
Obama called again Wednesday to extend the tax cuts for all but the wealthiest 2 percent of taxpayers. He'd let the tax rate rise for single taxpayers with adjusted gross income above US$200,000 and couples over US$250,000. The higher rate would apply only to their earnings over those thresholds.
Republicans warn of disaster if all the tax reductions aren't extended. Some Democrats in Congress appear increasingly wary of the administration's approach, especially with prominent economists calling for a two-year extension for all the tax cuts, because they say the economy's too weak to raise taxes on anyone yet.
Bush's tax reductions temporarily created six income tax brackets - at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. If not extended, they'd revert to brackets of 15 percent, 28 percent, 31 percent, 36 percent and, for those who earn more than US$382,650 next year, 39.6 percent.
The Treasury Department estimates that extending all the tax cuts would deny the Treasury almost US$3.7 trillion in revenues over the next decade, swelling the national debt. But allowing the reductions for the wealthiest 2 percent to expire would narrow that loss to just under US$3 trillion by raising US$679.6 billion in new revenue from the wealthy, the Treasury estimates.
By the president's reckoning, a modest bump in the top tax bracket isn't going to harm the rich or the economy, since that was the rate that was in effect during the booming 1990s, the longest sustained economic expansion in U.S. history.
Republicans counter that the rich play an outsized role in the nation's economic life, and that raising taxes on them would weaken overall demand for goods and services, and could even tip the weak economy back into recession.
Some prominent analysts such as Mark Zandi, the chief economist for forecaster Moody's Analytics, are calling on Obama to back off his tax-the-rich proposal. He's no reflexive opponent of the president's; Zandi has praised Obama's 2009 stimulus as effective in sparking today's weak recovery after the economy's near-collapse. But Zandi doesn't think this latest proposal is well-timed.
"I think that given the very fragile recovery, policymakers shouldn't take any chances. In all likelihood the recovery would remain intact ... but I think there is enough uncertainty and fragility that it would be prudent not to raise anyone's taxes in 2011," Zandi said in an interview.
He stresses that reverting to higher tax rates to help reduce soaring federal budget deficits will be appropriate later. "I do think it's reasonable to raise the rates on those upper-income households in 2012 and 2013," he said.