[W]hile it's true that we can't solve all our fiscal problems by taxing the rich, we can solve more of them than people realize, as inequality has made the rich a lot richer than people realize. In 2007, the top 1 percent of households accounted for 23.5 percent of the nation's income. That is to say, for every dollar of income in America, the top 1 percent got about a quarter and the rest of us split the other 76 cents.What are the policy implications of continuing to solve our problems by taxing the top one percent? Of course we can set the top marginal rates as high was we want. The important question is whether this is a good idea.
Ezra is correct that the richest households accounted for 23.5 percent of the nation's income in 2007. But as the Tax Foundation points out, the top one percent of earners also paid 40.4 percent of all income taxes in 2007.
Is it really smart to have such a large portion of our federal income tax revenue coming from such a narrow base? Of course not. In fact, it's more dangerous than many people realize, since earners in top one percent tend to share many common characteristics.
The truth is that it's unwise for the federal government to get most of its revenue from such a narrow subset of the population for the same reason that it's unwise for an insurance company to cover mostly houses in a particular neighborhood. It's bad to have so many correlated risks. You need to diversify.
But how do you diversify when the wealthy have so much and the rest of us have so little?
Debates over tax policy are often framed in terms of rich versus poor. There are, as John Edwards insisted during the 2008 Democratic Primary, "two Americas." President Obama has arbitrarily decided that the division between these two Americas begins around the $200,000 income level. Anyone below this level should be exempt from federal tax increases, while anyone above this level should experience substantial rate increases.
Sounds good to most of us. But is it really fair that those making between, say, $30,000 and $199,000 should be insulated from any kind of federal tax hikes? Is it smart to tell so many people that they can have more services without having to pay more money? Is it good policy?
Politically, it may be wise to tell 95 percent of Americans that they should never expect to see their taxes raised. But, outside the world of electoral gimmickry, narrowing the tax base so dramatically isn't just stupid, it's essentially fiscal suicidal . . . .