Government fiscal constraints seem to make the rich bear more and more tax burden. The Wall Street Journal reported interesting arguments about tax on the rich. As the government tries to reduce the government deficit, a simple way to achieve that goal is to raise tax and to decrease expenditure.
As income equalities widen, more people fall into poverty trap, and society gets older, social security related spending keeps increasing and government does not have much discretionary budget. There does not seem to be much room to reduce expenditure. So, the answer for the fiscal problem would be to increase the tax for the rich.
Some economists and politicians are arguing that the rich should bear more tax burden because the income gap keeps widening and the rich can bear more tax. Obama administration seems to favor more tax burden for the rich. When it is not easy to increase tax rate, the government tries to limit tax breaks to collect more tax from the rich.
Other economists and politicians are arguing that the rich already bear too much tax burden. If tax rates for the rich increase further, it will cause negative effects on economic activity and tax revenue. They are referring to the Laffer curve, which explains the relationship between tax rates and tax revenues. According to the Laffer curve, if the tax rate increases above the certain threshold, increase of tax rates actually causes tax revenue to decrease. The Wall Street Journal also reported that, according to the nonpartisan tax policy center, top 1% of income earners comprise 29% of total federal tax revenue whereas their income comprises 17% of total incomes. The rich may want to use this statistics to argue for their unfair heavy tax burden. But, this may not be a strong argument for them. Even though they bear higher share of tax than their share of income, top 1% earners’ disposable income after tax is not compatible with rest of income earners. They have much more ability to bear high tax rates than other people.
I am not sure that the current level of taxation is reaching the threshold rate to actually cause counter effects on the total tax revenues. But, considering the fact that the rich people benefited from tax reduction during the previous republican administrations, the rich can bear more tax. Even some super rich people like Warren Buffett and Bill Gates argue for more tax for the rich.
Anyway, the government is in difficult situation to deal with this highly controversial issue. This fiscal and tax debate has become a hot potato. Every trial to make a deal with this issue consumed a lot of political energy, and sometimes caused economically negative effects as we observe the previous debate on increase of the debt ceiling. As economy recovers from the crisis, I hope this tax issue can be solved more smoothly.