Government

It Stinks, But The Only Way To Fix The Economy Is To Squeeze The Middle Class

Here's Adam Davidson's most recent New York Times Magazine column, It's Not Just About the Millionaires. Read all of Davidson's Times Magazine columns here.

Protesters at Occupy DC.

Protesters at Occupy DC. Jacquelyn Martin/AP hide caption

itoggle caption Jacquelyn Martin/AP

This election is about stark differences on economic policy, but one of the few fiscal issues on which Democrats and Republicans agree — surprisingly — is how to tax corporations. Every Republican presidential candidate, and even the guy who currently has the job they're after, wants to lower rates. Raising them, or even maintaining them, might satisfy the anti-corporate angst of protesters and populists, but it won't come anywhere near paying off our debt.

Most people who study the issue agree that the top federal corporate tax rate (35 percent of profits) is simply too high. The cardinal rule of taxation is that whatever you put a levy on, you'll inevitably get less of. Taxing corporate activity means less investing, less hiring, fewer jobs and a smaller economy, which hurts the rich, the poor and the middle class alike. While this may seem like Republican propaganda, NPR's "Planet Money," for which I work, polled many leading progressive policy groups and academics, all of whom told us that they would support lowering the top corporate tax rate. In his 2011 State of the Union address, President Obama agreed. Republican candidates are even talking specifics: Mitt Romney proposes dropping it to 25 percent; Rick Perry wants to lower it to 20 percent; Herman Cain, of course, is pushing 9 percent.

If everyone agrees that corporate taxes should be lowered, why isn't there a deal? One reason is that many corporations, despite claims to the contrary, don't mind a complex tax code with a high statutory rate — often because few large companies pay anything close to 35 percent. Multinationals avoid taxes by moving profits around their global subsidiaries. U.S.-based businesses hire huge teams of lawyers to navigate motley tax laws and widen every loophole. All politicians advocate eliminating these loopholes until it's their constituents that benefit — in which case the loophole is renamed an "incentive." Republicans and Democrats in Iowa will punch you in the nose if you question ethanol tax credits. Most people who run for office in Texas and Louisiana like all the sweet tax deals for oil extractors.

Any serious analyst who isn't paid by one of the tax-benefiting industries would suggest eliminating most industry-specific loopholes. But the problem is that cutting them will not even come close to reviving our economy. Alternatively, even if we eliminated all corporate taxes, the extra $250 billion per year at the companies' disposal wouldn't be enough to make our $14 trillion economy grow. President Obama tried an $800 billion stimulus, and we're still debating whether it helped or hurt or did nothing at all.

Businesses are easy targets, but taxing them — or not taxing them — isn't the answer. If you can ignore the politics and look at our country's fiscal picture as a math problem, the situation is fairly grim, but it's also fairly clear. Unless we make serious changes, we are going to be in far more debt than we can afford. There have been two important bipartisan commissions — Rivlin-Domenici and Simpson-Bowles — that reached the same conclusion: we need to make some significant cuts in Social Security, Medicare and defense and, at the same time, pay a lot more in taxes. The total cost could be around $400 billion more a year.

Corporations aren't going to be able to pay that much. And as much as some people might want to punish them, or at least the C.E.O.'s that run them, it would wreck our economy if we did. It's tempting to look to our millionaires and demand they pay more in taxes, but the same inconvenient truth applies. When you add up all the money made by all the people who earn more than $1 million a year, it amounts to around $700 billion. But since the millionaires already pay close to $200 billion in taxes, the government would have to increase rates to nearly 100 percent — which is about the worst idea ever — for it to have any real impact.

It serves the interest of both parties to argue about taxes on corporations and the wealthy because neither wants to discuss the alternative, which is where things get touchy. To solve our debt problems, we have to go to where the money is — the middle class. People who earn between $30,000 and $200,000 a year make a total of around $5 trillion and pay less than 10 percent of that in taxes (owing mostly to tax incentives and the fact that most families make less than $68,000, where larger tax rates begin). Increasing the middle-class tax burden an additional 8 percent, however, would actually have a bigger impact than taxing millionaires at 100 percent. Still, many experts say we don't need to raise the tax rate on the middle class; we just need to get rid of some of those despised loopholes (or beloved incentives). Most reform proposals suggest gradually eliminating the most popular tax deductions, like mortgage interest rates ($120 billion per year) and workplace health insurance ($200 billion per year). Regardless, most economists acknowledge, and most politicians privately concede, that the middle class will have to give up some benefits (Social Security, Medicare) or it will have to pay more in taxes. Actually, it will probably have to do both. The millionaires will be paying more, too. Leading Democrats are proposing a nearly 10 percent hike.

It's a tough but manageable financial math problem. And America's middle class is actually a lot luckier than its counterparts in Greece, Spain or Ireland, who will be paying higher taxes while their countries' economies shrink, or stagnate. Even the Fed's dark forecasts anticipate that the U.S. economy will return to healthy growth (about 3 percent annually) within a couple of years. Unless we hold on to the fantasy that the solutions to our problems lie in the bank accounts of rich people and corporations.

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