Do Taxes Narrow the Wealth Gap?
Obama wants to tax the rich. Republicans say he's promoting class warfare. Can taxes bridge the income gap?

The Cost of "Fairness"

President Obama's new "Buffett rule" is more a guideline than a rule, because his plan offers no details on how to implement it. Regardless of what it's called, though, this precept can only impede serious discussion of tax reform and fiscal balance.

Higher tax rates will discourage saving by the group that finances much of the investment that growth and wages depend on.

To begin, Congressional Budget Office data show that millionaires, as a group, already pay a higher fraction of their income than the middle class in combined individual income taxes and payroll taxes. And, that doesn't even include the corporate income taxes imposed on the income they receive from their stock holdings.

The real question is not whether millionaires should pay more than the middle class, but whether they should pay more than they do today? Raising millionaires' taxes may seem fair--they can obviously afford to pay more. But, this policy has significant economic costs. Higher tax rates will encourage millionaires to report less taxable income, limiting the revenue inflow. And, the higher rates will discourage saving by the group that finances much of the business investment on which economic growth and wages depend.

If we're willing to accept those costs, tax increases on millionaires can be part of the fiscal solution. But economists and commentators across the political spectrum agree that taxing the rich cannot be the full solution--basic math shows that closing the fiscal gap will also require entitlement cuts and tax increases on the broad middle class.

The president's plan largely omits such measures, relying instead on ephemeral savings from cutting doctor and hospital payments and already counted savings from drawing down troops in Iraq and Afghanistan.

It's unfortunate that the president did not present a more balanced plan. But, it's hard to blame him: Republican lawmakers and presidential candidates have repeatedly vowed to never consider such a plan.

In the end, the fiscal gap cannot be closed simply by taxing the rich or cutting discretionary spending. The only solution is a bipartisan compromise that makes hard choices on entitlements and middle-class taxes.

Alan D. Viard is a resident scholar at AEI.

Samantha Appleton/White House

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