Rising gas prices and record earnings for oil companies are like movie trailers on TV — an invitation to the theater. Distinguished-looking senators get to cluck their tongues and poke fun at even more distinguished-looking corporate CEOs.

Like celebrities hawking weight-loss programs and bone-strengthening medicines, the politicians are exploiting the public’s hunger for villains and simple solutions in order to earn some political royalties with the voters at home.

This civic theater is unfortunate not because oil companies shouldn’t pay more taxes but because it diverts attention from the larger issues of collective responsibility for an unsustainable deficit, shared sacrifice and serious tax reform.

When will the distinguished senators call before them a row of distinguished owners of jumbo mortgages to defend their enormous interest deductions? Or a collection of small business owners to defend their employee health insurance deductions? Don’t hold your breath.

It’s easy to cherry pick villains and say proudly, “We’re going to take away some of your ‘obscene’ profits and pay down the deficit.”

It’s far more difficult to say, “We’re going to take away the whole morass of credits, incentives, deductions, exemptions and other special-interest complications of our current tax system and ask all taxpayers, ‘How much more than 12.5 percent of your total income would you be willing to pay to meet our collective obligations?’ “

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Thinking about how we might answer such a question would at least help us understand the nature of the problem.

Imagine the following: First, abolish the morass of credits, incentives, deductions, exemptions and other special-interest complications. Make taxable income the same thing as adjusted gross income. Next, ask the question, “How much of that income would we have to collect to cover our expenses, not to pay down our debt, just to cover our current expenses?”

Let’s start with the usual suspect — the rich.

Who are the rich? Let’s say they’re those with incomes above $1 million. Right now, they pay between 21 percent and 25 percent of their incomes. Let’s soak them by raising their rate to 60 percent.

Assuming no change in income-earning behavior and a strong collective commitment to keeping all the loopholes removed (and those are both heroic, perhaps even outlandish, assumptions), this would raise about $397 billion or about 31 percent of our $1.26 trillion deficit.

Clearly, we’ve got a long way to go. Let’s move to the middle class. And let’s call them households earning $50,000 to $500,000. Right now, they pay (considering all their exemptions, deductions, etc., and their tax rates) between 8 percent and 24 percent. After filling in all their loopholes, let’s charge them 25 percent of adjusted gross income.

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Again, assuming no change in behavior, that would bring in nearly $652 billion above current collections and bring us up to just over 83 percent of our annual deficit. Progress, but we’re not home yet.

So let’s continue moving down the income scale and tax those earning between $25,000 and $50,000 at a rate of 15 percent. This would raise another $136 billion and bring us 94 percent of the way to covering the deficit.

But we’re still not there, so let’s continue this experiment in thinking about shared sacrifice. Let’s tax those earning $10,000 to $25,000 at 10 percent of income. And then, just to guarantee that everyone has some skin in the game, let’s tax those earning between $1 and $10,000 at 5 percent. This will bring in another $50 billion and bring us to 98 percent of covering our deficit.

So is there anything to learn from this little exercise?

At the very least, I hope that we will learn that there is no easy answer to our current fiscal mess.

Socking it to big oil and soaking the rich may seem gratifying, but it won’t do the trick.

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Even if we throw out the tax code and start over, we’re going to have to tax ourselves at rates none of us are accustomed to if we are to cover our deficit.

This may not be pleasant news, but it is the harsh reality we must confront if we are to maintain prosperity for our nation.

If you don’t like the results of this little exercise in taxation, dream up your own.

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:
clawton@maine.rr.com

 


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