Ace in hole: Tax Bush-era breaks

Federal tax cuts for rich equal state's deficit

Writer and occasional TOP-Ed contributor Peter Schrag reported this intriguing figure in a column in the California Progress Report this week: Continuing the Bush-era tax cuts for the top 5 percent of California earners will save those 888,000 taxpayers about $20.5 billion this year ($14 billion for the 1 percent earning an average $1.775 million and $6.5 billion for the 4 percent earning an average of $310,000). That, Schrag noted, equals about three-quarters of the $28 billion deficit the state will face over the next 18 months, or the entire deficit for 2011-12.

Schrag doesn’t suggest hitting up the rich for the full amount, but he suggests – and Gov. Jerry Brown should consider – grabbing a piece of it for the next year or two.

Instead, at this point, Brown reportedly will be asking voters this spring to continue the $8 billion in temporary taxes due to expire this year: 0.5 percent extra on  the car tax, 1 percent additional sales tax, and a 25 percent increase in the income tax rate – and offer a harrowing scenario of cuts to services if they are rejected.

Brown will be asking Californians to share the pain – a theme a raised at his inauguration. “The year ahead will demand courage and sacrifice,” he said. You know, like his great-grandfather, August Schuckman, who made the dangerous trek from Missouri to California in the 19th century, we’re all on the same wagon train and have to pull together for survival.

But, as Tony Quinn wrote in another column Monday, California voters have already rejected extending those taxes and he doubts they’ll change their minds.  Quinn christens the taxes the Working Families Tax Increase because they’re supposedly regressive (except for the sales tax increase, they’re really not). And he fans resentment over new taxes by citing a few cases of pension abuse. Expect more of that argument if Brown doesn’t deal with pension reform, as he has promised.

Taxing a portion of the tax cuts on the richest 5 percent could make asking everyone else to continue their temporary taxes more palatable. The Obama-GOP deal on the Bush tax cuts will add enormously to the federal deficit. Taxing some of that $20 billion at least would reduce California’s deficit. That’s a fair request.


  1. Mr. Fensterwald,
    First, extending the current tax rates will not result in a tax cut for anyone–all taxpayers (as compared to lower income earners that pay no federal income tax) will simply pay the same rate that has been in place since 2001. Second, extending the tax rates will not add enormously to the federal deficit; in fact, keeping the tax rates unchanged will benefit economic recovery, which in turn will increase revenues to the federal treasury.  Instead of taking more money out of the pockets of the American people, try focusing on cutting expenditures. Concern over the ballooning federal deficit would have been more appropriate before decisions on TARP, stimulus funding and health care reform–all of which combined pushed the deficit up several trillion dollars.

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  2. Mr. Fensterwald,
    I have to agree with Bob Reeb and disagree with your statement regarding the Bush-Era tax cuts saving money for the top 5%. It seems to me these people (myself not being one of them) are not saving money, the government is taking less. We need to focus less on revenue on more time on expenditures. Our schools have operating on an 18.4% deficit factor of the last two years with more coming. What would be fair is to deficit the entire state by the same and get our insatiable appetite for spending under control.

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  3. I’m sorry, but I have to disagree with Mr. Reeb about the current tax rates returning increasing revenues to the Treasury. If that condition is true, then there should have been a revenue increases during the Bush administration. In fact, especially for the states, revenue was flat or decreasing. This reducing the tax rates to increase revenue idea was invented in the Reagan administration by one of his economists, Arthur Laffer, Dick Cheney, and Donald Rumsfeld. The “Laffer Curve” (no jokes) was one of the supply-side economic principles. Too bad, it didn’t work, as debunked by Nobel Prize in Economics winner Paul Krugman. The only time when the US Treasury ran a surplus was during the Clinton administrator—the highest tax bracket at 39% instead of 36% as it changed under the Bush (the second) administration. (And should I mention the prosperity in the Eisenhower administration in the 50s when the highest tax rate was 50%.)
    Now I do believe that government spending should be reduced and that TARP did not work as promised; in fact, when demand is so low as it was two years ago, the government investment in the economy should have been larger and targeted to infrastructure to create jobs, not rescuing banks and investment houses that caused the economic problems in the first place. All financial regulations that were working before the Bush administration had them repealed should be reinstated to restore stability to the financial markets. When lenders start lending again, businesses can grow and start hiring. Reducing taxes on the highest income does not help someone unemployed for over 99 weeks. It doesn’t matter how much supply-side economic programs are in place if the lower 90% of the population can’t afford to buy anything.
    Education too often is seen as a cost—it costs government to build schools, hire teachers, and prepare students for the standardized tests (which is another story). Instead, education is an investment in the present (good schools maintain property values) and the future (well-educated people prepared for 21st century jobs). Or as I tell my students, “you need to listen and learn so you can get good grades to get to a good college to get a good, high-paying job to pay taxes to keep me in my old age.”
    So, since the highest income taxpayers reap the most rewards from an educated workforce, I see no problem in having them pay more taxes for that privilege.

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  4. A very thoughtful response, Mr. Wickmeyer. Thank you.
    Although I disagree with your arguments regarding tax levels, I agree with your statement valuing education. As for taxation, the higher the taxes the more government grows and it rarely “invests” in anything that produces benefits to the economy–investment in infrastructure and education being two obvious exceptions as you noted. Increasing the tax rates on upper income earners has multiple negative effects. For one, it takes money out of the private sector that otherwise could be invested or directly expended. It also dampens the incentive to take risk to earn more income, increase investment (capital gains), and/or create new jobs. A corporation or individual can create a new job or pay more taxes, but especially in this economy, rarely do both.
    As for education, I believe the current K-12 model (not the teachers)  is failing California. When I was a kid–simply for purposes of comparison–we had 30 working class white kids in each classroom and it was much easier to teach given the homogeneous nature of the classroom. Now, California is much more diverse and we need to adjust to that paradigm.
    While I can’t say I agree or disagree that the highest income taxpayers reap the most rewards from an educated workforce, it is an indisputable fact that they pay more taxes than any other income segment in federal and California state taxes. The top 5 percent pay 40 percent of the total income tax revenues. It’s similar to the debate over setting an appropriate minimum wage–how much is enough? Between federal and California income taxes, earning one new dollar at the top tax rates results in about 50 cents in my pocket. At some point, the increased work hours, sleepless nights, regulatory and tax compliance challenges, et cetera just aren’t worth it. At that point, we all lose.

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