Reducing the Deficit: Reducing Tax Breaks for the Wealthy
Monday, September 26, 2011
Mr. President, over the last week or so I have outlined, here and in a letter to the Joint Select Committee on Deficit Reduction, a seven-part plan to reduce the deficit in ways that do not overburden American working families or damage economic growth. In my letter and in three previous speeches on the Senate floor, I have pointed out that revenues, and not just spending cuts, are necessary if we are to achieve significant deficit reduction. And I have discussed four proposals for restoring revenues: combating offshore tax havens; ending the corporate stock option loophole; and ending loopholes for hedge fund managers and derivatives traders.
Today I want to discuss three additional changes to our tax system that will make it more efficient and more equitable. We should make two tax rate changes: ending the unsustainable Bush-era tax cuts for the wealthiest Americans, and restoring capital gains tax rates to something approaching the rates in place under President Reagan. Also, we should replace the IRS’s antiquated tax lien system. These proposals, combined with the other points of my plan, could reduce the deficit on the order of $1 trillion over the next 10 years.
Now, some of my colleagues may balk at the notion of reversing years of tax breaks for the wealthiest Americans. But I believe if we take off our ideological blinders, if we look at facts – hard, stubborn facts – the need for these reforms is clear.
First, we should allow Bush-era tax cuts to end for those making more than $250,000. The case for this change is straightforward: It would restore a measure of fairness to the tax code that has been sadly lacking for more than a decade, and it would reduce the deficit by hundreds of billions of dollars.
Supporters of the tax cuts in 2001 and 2003 made a number of promises. President Bush said his cuts “will bring real and immediate benefits to middle-income Americans.” And yet in the decade since they began, the incomes of middle-class Americans have stagnated. According to the U.S. Census Bureau, the typical American household’s income, when adjusted for inflation, actually fell more than 8 percent from 2001 to 2010. President Bush said his tax cuts would increase the pace of job creation. And yet during the Bush years, jobs grew at roughly one-third the rate that we enjoyed during the Clinton administration. President Bush said “we can proceed with tax relief without fear of budget deficits, even if the economy softens.” And yet just those tax cuts going to the wealthiest 1 percent of Americans have added hundreds of billions of dollars to the deficit since 2001. So, these tax cuts have failed to deliver the promised benefits, and they have driven us deeper and deeper into debt. Ending them will bring down the deficit; President Obama’s proposal to end the cuts for high-income earners would reduce the deficit by an estimated $866 billion over 10 years.
What these tax cuts did deliver is a striking and continuing rise in income inequality. It’s no coincidence that as we passed a series of tax cuts whose benefits overwhelmingly flow to the wealthiest Americans, those wealthy individuals have seen their fortunes rise. A few decades ago, the wealthiest one percent of Americans took home 10 percent of all income. Today, they get 24 percent of all income. As those at the top have prospered greatly, middle-class wages have stagnated – again, down more than 8 percent, for the median American household, since the Bush tax cuts took effect.
A second proposal also would bring down the deficit and bring more fairness to the tax code: restoring capital gains tax rates closer to those in place during the Reagan administration. Capital gains are income from the increase in value of an asset, such as a stock. Today, thanks to the Bush-era tax cuts, the top rate on capital gains is 15 percent. That’s substantially lower than the 28 percent rate included in President Reagan’s Tax Reform Act of 1986.
The theory in slashing capital gains tax rates was that lower rates would encourage investment, job creation and economic growth. But as has been the case with slashing ordinary income tax rates for the wealthy, cutting capital gains taxes simply has not delivered what supporters promised. Given the stagnation in middle-class living standards that we have seen since the 1980s, it is difficult to argue to middle-class Americans that reducing capital gains rates made them better off.
Instead, this is another benefit that flows overwhelmingly to the wealthiest among us. According to the Tax Policy Center, more than 75 percent of the benefit from lower capital gains taxes goes to those with incomes over $1 million a year, and 94 percent of the benefit to those above $200,000.
This tax break for the most fortunate of our citizens also adds tens of billions of dollars each year to the deficit. The Congressional Budget Office earlier this year estimated that raising the capital gains rate by just two percentage points would reduce the deficit by about $50 billion over 10 years. Raising the top rate closer to Reagan-era levels would bring far more deficit reduction.
Those who fight to preserve these high-income tax cuts call attempts to end them “class warfare.” Mr. President, ending these tax breaks won’t start a class war. It will help end one – a war that, for more than a decade, has taken a devastating and immediate toll on the middle class, and created huge new deficits that damage their future prospects as well.
The simple fact is that if we’re to ensure that the burden of deficit reduction falls equitably, and that all our citizens are asked to contribute toward this goal, we must address these upper-income tax cuts that have helped balloon the deficit. Deficit reduction will require spending cuts, and some of those cuts will fall hard on working families. But we can’t ask them to carry the entire burden. That would be contrary to common sense, because spending cuts alone cannot achieve real deficit reduction. And it would be contrary to any sense of fairness. We all have to contribute.
Our constituents are speaking, and speaking loudly, on this topic. And they are speaking eloquently. Let me tell you about an email I received from a constituent a few weeks ago about our deficit.
This Michigan resident and her husband consider themselves upper-middle class – though she wrote that “many would call us wealthy.” She wrote to me that we need to cut spending, and to compromise to do it. “I will like some cuts and hate others and that is OK with me!” she wrote.
But she also wrote: “I also strongly urge you to consider passing what many would call tax hikes. … We are willing to pay a bit more to help our country and safeguard our children’s futures.” Upper-income Americans, she wrote, “aren’t paying taxes at a fair and just rate. Fix this.”
And we should fix it. This constituent of mine said she was part of a “silent majority” in favor of increasing revenue. I’m not sure how silent they are, but she is certainly part of a majority. In a recent Washington Post-ABC News poll, 72 percent of Americans – and 54 percent of Republicans – said they favored increasing taxes on those who make more than $250,000 a year as part of our deficit reduction strategy. Americans are strongly in favor of a balanced approach to deficit reduction that protects working families. They’re asking us to fight for the middle class, and it’s time we did so.
Let me discuss briefly the tax lien proposal. Tax liens are a basic tool to collect unpaid taxes. Today, federal law requires liens to be filed on paper in more than 4,000 locations around the country, determined by the location of the lien. The IRS maintains a service center that does nothing but monitor dozens of varying local requirements for lien filings, track filings, and release liens once they are paid.
I have introduced legislation, S. 1390, along with Sen. Begich, to replace this antiquated system with an electronic federal tax lien registry available to the public on the Internet at no cost. The IRS estimates that this change would not only save millions of dollars in administrative costs, but also enable the IRS to release liens more quickly once they have been paid and free up employees and resources for other work. Equally important, a public electronic registry could help encourage those who owe taxes to settle their bills and take enormous pressure off taxpayers who have paid what they owe.
Let me come back to where I started last week. Congress faces a difficult task in the weeks ahead. We must agree to $1.2 trillion or more in deficit reduction over the next decade. Failure to agree on a plan means automatic budget cuts through the sequestration process – including greatly damaging cuts to defense and other important federal programs.
In my letter to the Joint Select Committee and here on the floor, I have outlined ways to avoid that outcome, proposing common-sense changes that bring equity to our tax code and restore lost revenue. If we reject that course, it almost certainly means damaging cuts in important programs – programs that keep our nation safe, that keep our faith with senior citizens and veterans, and that prepare our children for the future. Rejecting that course almost certainly means a failure to significantly reduce the deficit, because spending cuts alone are not enough to accomplish the deficit reduction we need.
The choice is ours, Mr. President. I hope we will not allow ideology to blind us to the reality of our budget situation, to the needs of middle-class families, or to the strong and consistent message from Americans who are demanding a balanced approach to reducing the deficit.