Is it possible to solve the nation’s debt woes just by hiking taxes on the rich?
Probably not.
Even if marginal income tax rates were almost 100% for the richest Americans, that still might not yield enough new revenue to keep debt under control.
The findings, reported Thursday by the Tax Policy Center and the Pew Charitable Trusts, underscore the necessity of finding a balanced approach to budgeting in the near future.
The report assumes current tax policy as a starting point, and targets debt at 60% of gross domestic product, widely considered to be a sustainable level.
"Increasing the top two or top three individual income tax rates alone cannot achieve the debt-to-GDP targets under some … scenarios," the report said.
"You just have a very big gap and not that much income up there to fill it," said Eric Toder of the Tax Policy Center.
Of course, politicians aren’t advocating for the top rates to go anywhere near 100%.
Take Obama for instance.
He wants to let the top two tax rates — currently 33% and 35% — revert to their pre-2001 levels of 36% and 39.6%.
Most folks in the top two brackets, however, would still benefit from the continuation of the 10%, 15%, 25% and 28% rates on the portion of their income subject to the lower brackets.
By historical standards, those rates are pretty low. While income tax rates for top earners have been below 40% since 1986, they were as high as 91% in the 1960s.
Republicans want to go the opposite direction, with every remaining 2012 candidate now promising reductions in marginal income rates for most taxpayers.
To balance those tax cuts out, and still lower deficits, Republicans must be prepared to slash huge amounts of spending from the budget, a difficult task when Pentagon spending is still off-limits for many party leaders.
And that’s just not feasible.
The looming debt problem is just too big. Reducing it by spending cuts alone would require draconian changes that could hurt the economy far more than a mix of spending cuts and tax increases.
America’s debt challenge
And that’s what the Pew study illustrates so effectively. An approach to deficit reduction that focuses only on spending cuts, or only on revenue, is likely to produce quite a bit of pain for targeted groups.
With federal spending on track to expand further over the next decade, most budget experts agree that lawmakers must consider an all-of-the-above approach that means tough choices for both parties.
President Obama’s fiscal commission, which never gained the necessary traction with the White House or Congress, acknowledged as much.
"Together, we have reached these unavoidable conclusions: The problem is real. The solution will be painful. There is no easy way out. Everything must be on the table. And Washington must lead," the report said.
The commission recommended hiking taxes, cutting military spending, getting health care costs under control, increasing the social security retirement age, among other proposals.
The plan went nowhere.
And with lawmakers from both political parties locked in election mode for the rest of the year, there are few indications any real steps toward deficit reduction will be taken until at least the new year.
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