Washington needs money. The wealthy are prospering. Much of the middle class, meanwhile, is falling behind. Normal patterns of elective politics would suggest that tax hikes on the rich are in the bag.
That's what has happened before. Taxes on the wealthy soared during the Great Depression. After World War II, the top marginal rate went as high as 91 percent, staying there for 14 years before beginning a gradual decline toward today's level of 35 percent. Recent polls show that a solid majority of Americans--between 60 and 70 percent--favor higher taxes on the wealthy to help pay down the national debt and finance other priorities. There's even a group of "patriotic millionaires" who have pleaded with Congress to raise taxes on them and their fellow 0.1 percenters.
But raising taxes, even on a small sliver of people who would barely notice the extra withholding, has landed squarely on Washington's lengthy too-hard-to-do list. Democrats, of course, want to raise taxes for the top income bracket to the Clinton-era rate of 39.6 percent, or higher. But most Republicans are dead-set against tax hikes, even on billionaires, regardless of polls suggesting that they're violating the will of the people. In theory, Republicans are risking payback on Election Day, since voters who feel they're prioritizing the privileged few over the neglected masses could send them packing.
But protecting the wealthy could be a better political strategy than polls reveal. Here are four reasons why:
Many people sympathize with the wealthy. A meager paycheck doesn't automatically make people want to wield a pitchfork or join the Occupy movement. As economist J. Bradford DeLong explains, many members of the working class have long viewed the comfortable life of the wealthy as a kind of utopian ideal. "We don't wish to disrupt the perfect felicity of the lifestyles of the rich and famous," he writes. In modern America, it's generally understood that many people at the middle or even the bottom of the earning ladder—especially young people--like to imagine themselves as rich some day, so they're naturally sympathetic toward well-heeled people who, in their fantasies, happen to be their neighbors. That doesn't make it impossible to raise taxes on the rich, but it creates ambivalence.
People fear trickle-down taxes. If new taxes are levied on people with incomes of, say, $1 million or more, will the threshold remain that high? Many taxpayers doubt it. "One of the fears is that a tax that starts out as something that's only going to affect millionaires will tend to spread to lower incomes," says Dennis Jacobe, chief economist for the polling firm Gallup. "There's skepticism that the tax will be limited only to people making $1 million." Today, that skepticism is probably prudent, because the amount of new revenue needed to pay down the national debt is so large that higher taxes on the rich would probably only make a small dent. Many budget watchers feel it will take new taxes on the middle class as well, or at least a big cut in the deductions they can claim.
The money would go to a questionable cause. Government has a bad reputation these days, and even those who favor high taxes on the rich have their doubts about whether the government would use the money wisely. Congress's approval ratings have fallen to record lows recently, and it is Congress, after all, that has responsibility for appropriating tax dollars. In Gallup surveys, fewer than half of Americans say they trust the executive branch of the federal government, down from readings that were traditionally above 60 percent until they started falling a few years ago. Plus, Americans feel that Washington wastes half of all tax dollars in the first place. Given that level of cynicism, new taxes on anybody seem somewhat pointless.
Americans have more confidence in state and local governments, which might explain why tax increases at those levels have been easier to achieve. New York, for instance, recently approved a plan to raise the tax rate on individuals earning more than $1 million by nearly 2 percentage points, while trimming taxes for lower earners. That happened with virtually none of the controversy or vitriol that surrounds tax debates in Washington these days.
Tax opposers are strident—and effective. While those opposed to new taxes on the wealthy—or on anybody--are a minority, they're a vocal and activist minority. Such determined opposition can often be decisive in political battles. "Intensity matters," says Jacobe. "There are a lot of times when Americans overwhelmingly support some idea and it doesn't happen. That comes from the intensity of the people who oppose it." While tax opposers tend to be strident, tax supporters tend to be ambivalent, which makes overall support for new taxes weaker than polls suggest.
It seems certain that sooner or later, taxes on some people—and perhaps on many people—will have to go up. Without new taxes, the spending cuts needed to rein in the national debt would decimate cherished programs like Medicare and Social Security, plus the military. If a debt crisis like the one smothering Europe materializes in the United States—which is very plausible—then tax hikes may become an overnight necessity needed to save the whole economy. But for now, we have the luxury of putting them off, even if they would mainly inconvenience other people. The wealthy should make the most of the respite.