A Nickel on the Dollar

The other day execs from defense contractors told Congress that they're fine with having their taxes raised back to what they were during the Clinton administration. They should be: their salaries are paid by our tax dollars. Other CEOs, such as Lloyd Blankfein (Goldman Sachs) and Randall Stephenson (AT&T) said that a budget deal will require raising the marginal rate.

Many Republicans still refuse to bend to that reality, saying that it will destroy job creation and stifle everyone's incentive to earn more money. At issue is Obama's proposal to allow the top two marginal rates for the wealthiest taxpayers (married couples making more than $250,000) from 33% and 35%, to 36% and 39.6%. What exactly would that mean?

First, to be clear: these are marginal increases, so someone making $250,000 does not simply pay 39.6% of their salary. First you get to make a bunch of deductions, including the standard deduction, child allowances, mortgage, charitable contributions, state taxes, etc. This generally decreases wealthy people's taxes by a bunch right off the bat. (We'll ignore capital gains taxes for now, which Obama is proposing to raise from 15% to 20%, which is still a fabulous deal for the wealthy.)

So, let's say your taxable income after all those deductions is $250,000 a year. If you make $251,000 your taxes will go up by all of $46. Yes, by the magic of marginal tax rates each dollar you earn over $250,000 will cost you less than a nickel.

The Republican disincentive argument is so much hot air. Who in their right mind would turn down a promotion and a raise because their taxes will go up a nickel for each dollar more they earn?

But because there are so many rich people who make so much money, this nickel on the dollar would raise $800 billion over the next 10 years. That alone won't solve the deficit: some loopholes must be closed and programs will have to be cut, including defense, other discretionary spending and entitlements.

Why tax the wealthy instead of regular Americans? Why is that fair?

The wealthy will take a penny of that nickel and stick it in some foreign bank account. Another penny will go to buy an interest in a casino in Macau or a factory in China. Two more cents will be used to flip stock in the Wall Street casino (the companies will never see a penny from that "investment" and cannot hire a single worker from the sale of that stock). The last cent might be invested in something that might create a job here at home, an IPO, corporate or municipal bonds, take a cruise to the Greek Islands like Newt Gingrich after announcing a run for the presidency, or buy a yacht or a third mansion.

On the other hand, middle-class Americans will immediately spend four cents of that nickel on things right now: clothes (from Walmart), food (from Walmart, Kraft and Nabisco), drink (from Coca Cola and Anheuser Busch), cell phones (Apple and AT&T), and housing (which benefits construction companies across the country). The remaining penny might be spent to buy down debt, put into savings for retirement, college or a vacation, and nearly all of it will ultimately be spent here in the United States.

In short, tax cuts for the middle class are immediately converted to profits for corporate behemoths like Walmart, AT&T and Apple, and therefore the wealthy who reap the profits.

By contrast, the Republican plan to eliminate loopholes would hit middle-class Americans just as hard as the wealthy, reducing their disposable income and therefore corporate profits.

The president and the Congress need to understand the larger-scale workings of the economy instead of getting bogged down in arguments over class warfare and government picking winners and losers. Almost every cent middle-income Americans get in tax relief is going to wind up as profit on a corporate balance sheet, which means higher salaries, big bonuses and increased dividends for the wealthy.

It's a great return for the country for only a nickel on the dollar.