Opinion

Tax fairness would increase growth

Get ready for the tax wars.

President Obama wants to raise taxes on the rich, setting a minimum tax rate of 30 percent on millionaires (the so-called Buffett Rule, named after billionaire investor Warren Buffett, who says it's unfair that he pays a lower tax rate than his secretary).

Mitt Romney, the presumed Republican presidential candidate, wants to lower taxes on the rich. He supports the House Republicans' plan to cut the highest tax rate from 35 percent to 25 percent, thereby reducing the taxes of millionaires by an average of at least $150,000 a year.

This should be a no-brainer. Rich Americans are taking home a larger share of America's total income than they have at any time since the 1920s, yet paying the lowest tax rate in more than 30 years.

Meanwhile, the nation faces two giant deficits. Unless the rich pay their fair share of taxes, both will only become worse.

The first is a deficit in public investment. Our roads, bridges, ports, sewer and water systems, and public transportation systems are outmoded. Some are literally falling apart. Meanwhile, many of our schools can't afford textbooks or science labs, students are crowded into classrooms with 30 or more other children, and public colleges and universities are starved for funding.

The other is a budget deficit that's projected to rise into the stratosphere, especially as aging Baby Boomers need more health care.

Surely government can be more efficient, the military can be smaller, and pork-barrel spending can be eliminated. But anyone who thinks we can balance the budget without additional revenue doesn't know basic math.

So how can conservatives possibly object to raising taxes on the wealthy?

Easily. I recently debated a conservative economist who claimed people at the top are the entrepreneurs and job creators, as if he were stating a well-accepted economic principle: "If we raise their taxes, we'll have fewer jobs and slower growth."

One of the most pernicious falsehoods you'll hear during the next seven months of political campaigning is that there's a necessary trade-off between fairness and growth.

Our history suggests the opposite. Taxes were far higher on top incomes in the three decades after World War II than they've been since. The top marginal rate was over 70 percent. Even after deductions and credits, rich Americans paid an effective tax rate of over 50 percent.

And the distribution of income was far more equal than it has been since.

Yet the American economy grew faster in those years than it's grown since Ronald Reagan slashed tax rates on top earners in 1981.

This wasn't a postwar aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush cut taxes on the rich in his first term.

If you need more evidence, consider modern Germany, where taxes on the wealthy are much higher than they are here and the distribution of income is far more equal. Yet Germany's average annual growth has been faster than that in the United States.

Higher taxes on the wealthy help finance investments in infrastructure and education, which are vital for growth and the economic prospects of the middle class.

In the decades after World War II, we built an interstate highway system and expanded public colleges and universities, and the nation's productivity surged.

Higher taxes on the wealthy can also allow for lower taxes on the middle - potentially fueling enough middle-class purchasing power to keep the economy growing. As we've seen in recent years, when disposable income is concentrated at the top, the middle class doesn't have enough money to boost the economy.

Finally, concentrated wealth can lead to speculative bubbles, as the rich invest in the same limited class of assets - whether gold, dot-coms or real estate. When these bubbles pop, the entire economy suffers.

What we should have learned over the last half century is that growth doesn't trickle down from the top. It percolates upward from working people who are adequately educated and sufficiently rewarded and who feel they have a fair chance to make it in America.

If anything, the Buffett Rule doesn't go nearly far enough. We should restore tax rates to what they were before 1981, and make the capital-gains rate the same as the rate on ordinary income. There's no good reason why Romney should pay a rate of less than 14 percent on an income of more than $20 million.

Fairness isn't incompatible with economic growth. It's essential to it.