Problem three: high tax rates, low tax revenue. The fiscal-cliff deal gains Democrats one huge symbolic victory: it obliges Republicans to vote with Democrats to raise taxes on the richest Americans. But symbolic tax increases hardly begin to cover the real costs of government.
We’re not going to pay for the government we’ve already bought—never mind the fast-rising costs of Obamacare—by trying to squeeze more and more out of the small percentage of couples who earn more than $450,000 and individuals who earn more than $400,000. Yet the fiscal-cliff deal makes permanent the post-2001 reduced tax rates on incomes below these levels, i.e., most of the incomes in the country.
America overrelies on income taxes, compared with all other advanced democracies. The fiscal-cliff deal, which was supposed to put the federal government on a sounder financial footing, perpetuates the overreliance. The deal is founded on a fantasy that the rising costs of the services we all use can be met by tax increases only on the tiniest minority among us.
As we need to stop thinking about “entitlements” and start thinking about health care, so too we need to stop thinking about income-tax rates and start thinking about new kinds of taxes: taxes on energy use, on carbon emissions, and on consumption generally. Who remembers now that the much-praised Simpson-Bowles commission proposed a value-added tax, a national sales tax like the one in place in every other developed country? Who has heard that a $20-per-ton tax on carbon emissions, rising 4 percent a year, would produce twice as much revenue as the president’s original call to allow the lapse of all the Bush tax cuts on incomes over $250,000?