I recommend reading Josh Barro on how Congress should respond to the Occupy movement and Alan Viard on the wisdom of millionaires’ taxes. One of the things I like about Viard is that he is a straight-shooter, e.g.,
The real question is not whether millionaires should pay more than the middle class, but whether they should pay more than they do today? Raising millionaires’ taxes may seem fair — they can obviously afford to pay more. But, this policy has significant economic costs. Higher tax rates will encourage millionaires to report less taxable income, limiting the revenue inflow. And, the higher rates will discourage saving by the group that finances much of the business investment on which economic growth and wages depend.
Note that Viard isn’t claiming that these costs will be catastrophic. He is merely acknowledging that there are some taxpayers at the margin who who will respond to a tax increase by consuming in different ways. Firms, for example, might offer more compensation in the form of lavish corporate facilities rather than in salary. There is obviously considerably disagreement about the scale of the economic costs of increasing marginal taxes, and we’d need to have (a) a clearer sense of the policy change (obviously) and (b) of the larger economic landscape, e.g., to what extent can firms and individuals use offshoring and non-cash compensation and automation to shift their portfolios away from taxable labor income. As this larger landscape changes, MTRs could become more or less impactful.
If we’re willing to accept those costs, tax increases on millionaires can be part of the fiscal solution. But economists and commentators across the political spectrum agree that taxing the rich cannot be the full solution — basic math shows that closing the fiscal gap will also require entitlement cuts and tax increases on the broad middle class.
The president’s plan largely omits such measures, relying instead on ephemeral savings from cutting doctor and hospital payments and already counted savings from drawing down troops in Iraq and Afghanistan.
It’s unfortunate that the president did not present a more balanced plan. But, it’s hard to blame him: Republican lawmakers and presidential candidates have repeatedly vowed to never consider such a plan.
In the end, the fiscal gap cannot be closed simply by taxing the rich or cutting discretionary spending. The only solution is a bipartisan compromise that makes hard choices on entitlements and middle-class taxes.
Both pieces are worth your time.