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Social Security Fix: Veto the VAT, Raise Taxes on the Rich

(photo: bright strangely)

Rich people are worried that the cat food commission might suggest raising their taxes. They trot out their spokespeople to howl about tax increases in their proxy publications (redundancy in the original).

Ryan Ellis, policy director at Americans for Tax Reform, one of the most vigorous anti-tax groups in Washington, said “pro-growth” tax hikes don’t exist.

“They’re all anti-growth, any additional taxes on top of our existing tax burden, by definition,” said Ryan Ellis, policy director at Americans for Tax Reform, a group that is against most tax increases.

“Any time you take tax dollars out of the private economy, you’re taking away the seed corn of economic growth. You’re crowding out the private sector. It’s like taking oxygen away from a fire,” Ellis said. “To talk about doing it in a pro-growth way strikes me as absurd. You’re talking about doing the least amount of damage, not helping anything.”

This is a sad example of the exhausted language of the misguided economists who brought us Trickle-Down: Investments by the rich are the source of all good things. Anything we do to interfere with that, like raising taxes, will be the end of the universe.

But the well-off needn’t worry, because the most likely tax “hike” would be a new VAT tax, a kind of sales tax, which means that average citizens will shoulder the burden of the increase. That is a grossly unfair solution, and one that would in fact reduce consumption and growth.

We do need to raise taxes, and the fair way to do it is to raise taxes on the richest Americans. We should create two new brackets, one for households making $400,000 annually, approximately the border for the top 1 percent of households in 2007 (.pdf), and another for households with incomes in excess of $750,000. The raise should be sufficient to cover the coming deficits in Social Security, and part of the gap in Medicaid. We need $29 billion this year to pay for the shortfall; out of the $6.958 trillion total income to the top 1% in 2007, it works out to a marginal increase of .42%.

Here are two good reasons to take this approach:

1. The deal cut by Alan Greenspan and the Democrats in the mid-1980s was to increase Social Security taxes far beyond what would be needed to fund the annual payouts to Social Security recipients. That money would go to a special Treasury bond which would not be traded but would earn interest. The extra cash, which today totals $2.539 trillion, went into the general fund, where it disguised the real extent of the deficits that Reagan-era politicians ran up by cutting taxes on the rich. The bonds would be repaid when needed to make up for the deficiencies that would come when the Baby Boomers retired.

Now we need the money; it’s time to pay off the bonds. Someone’s taxes will go up. The wealthy got the benefit of the cuts, and they should pay the tax increase. It is true that the rich today are not the same people as the rich of the ‘80s, but this class has trillions more in income and assets than it did in the ‘80s. The weren’t hurt by the Great Crash. . . like the rest of us.

Trickle-down isn’t just wrong, it’s dangerous to the financial health of everyone except the rich.

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