November 12, 2013

Tuesday Tax Tradeoff: Ending Automatic Budget Cuts to Domestic Services OR Continuing Special Low Tax Rates for Wealthier Americans

By William Rice, Policy Consultant, Americans for Tax Fairness

TaxTradeoff_Sequester-GrossBoth political parties hate the “sequester”: automatic budget cuts that sliced about $90 billion this year from education, medical research, housing, defense and many other services Americans depend on. It didn’t matter how much these programs and services were needed or how well they worked. And about $400 billion more in domestic cuts are coming over the next eight years.

As Congressional budget negotiators work to figure a way to modify or replace the sequester, an unexpected person has put forward an idea. Billionaire money manager Bill Gross — founder of PIMCO, the world’s biggest bond fund — has recommended ending a special low tax rates enjoyed by the wealthiest Americans (like him). This alone would raise enough revenue to cover the amount of the cuts to domestic services mandated by the sequester.

The sequester was never supposed to actually happen. It was a threat constructed to force a budget compromise that included both spending cuts and new revenues. The sequester is a blunt instrument considered so terrible that most members of both parties will do anything to avoid it. But Republicans have opposed raising one dime in new revenue, even from billionaires and huge corporations. So now the worst budgeting tool in history is set to keep chopping blindly away, year after year, at programs and services that serve the American public. Total Nine-Year Domestic Sequester Cuts: $492 billion (p. 3)

Capital gains are the profit investors make when they sell an asset like a stock or bond for more than its purchase price. This type of income is most often earned by people who are already wealthy. In 2012, 70 percent of such gains went to the top 1 percent of households. But even though this money is made sweat-free, it is taxed at a maximum of 20 percent. That’s a lower marginal tax rate than many middle-class workers pay. This tax-code preference that taxes income from wealth at a lower rate than income from work is why rich men like Warren Buffett and Mitt Romney pay lower tax rates than many of their lower-level employees. 10-Year Tax Break: $533 billion (pp. 5-7)

Taxing wealth like work won’t hurt billionaires like Bill Gross (we have his word on that), but it will allow us to end blind budget cuts that are hurting us all.