Paul L. Caron

Wednesday, April 21, 2010

Cowen: With 60% Marginal Tax Rate in 2011, The Time Has Come for Spending Cuts

New York Times op-ed, Can’t Cut Spending? Look Around the Globe, by Tyler Cowen (George Mason):

America's long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, we’ll likely see a combination of revenue increases and spending cuts. And we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high.

Consider the tax burden on high earners once the Bush administration’s tax cuts expire next year. Add up the federal, state, city and sales taxes for a lawyer in New York City who earns $300,000 a year. Depending on the circumstances, this individual could be facing marginal tax rates in the range of 60%. Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. ...

The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.

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Tax policy should probably not be driven by the needs of fourth year associates at white-shoe NY law firms.

Anyway, even if that were the criteria, a better approach would be to encourage the state and local governments to get their costs in line. We should theoretically eschew the periodic AMT "fix" that allows the leafy 'burbs back east to run public schools better than my local prep school, and city parks that are about like a country club--all tax deductible. That would be a little less than a trillion dollars over the next ten years according to CBO.

We were doing just fine without the Bush tax cuts. Letting them expire would raise $2.5 trillion over the next ten years according to CBO--and the hypothetical associate could still keep his AMT "fix"

Posted by: jim harper | Apr 21, 2010 7:24:46 AM