Pitting one half of America against the other

The first shot was fired yesterday in what promises to be a years-long battle over which of the Bush tax cuts will be allowed to expire come 2011.  And the way the battle is shaping up, politicians are pitting half of the country against the other half.

I almost hesitate to write about this, simply because the debate in Washington over “tax policy” is so completely fouled up.  In the generation since supply-side economics came to the fore, the debate has come to focus almost entirely on what will generate the most revenue.  Democrats want to raise taxes to bring in more revenue right away, Republicans want to cut taxes just the “right” amount to stimulate economic growth… and thus bring in more revenue (sort of a conservative Keynesianism).

No one (aside from Ron Paul) talks about actually cutting government spending, which is where the debate properly belongs.  Any tax cuts that come without accompanying cuts in spending amount to merely more government spending whose costs get passed along to later generations.  Enjoy your rebate later this spring; you’ll end up giving it back in the form of a (further) depreciated dollar sooner or later.

So with that caveat aside, let’s see just how the debate stands to pit one-half of America against the other.

The debate began in earnest yesterday with a couple of votes in the Senate.  They were symbolic, utterly meaningless in terms of what will ultimately be enacted into law after the presidential election.  But the opportunity to preen and posture was enough to drag Senators Clinton, McCain, and Obama off the campaign trail and back to Washington.

Buried within the Associated Press coverage was the real nut of the story (often you have to read way down to find the actual news):

Obama and Clinton both promise to reverse Bush’s tax cuts for wealthier
taxpayers, but the Democratic budget they’ll be voting for would allow
income tax rates to go up on individuals making as little as $31,850
and couples earning $63,700 or more…

Under both [the House and Senate] Democratic plans, tax rates would increase by 3 percentage
points for each of the 25 percent, 28 percent and 33 percent brackets.
At present, the 25 percent bracket begins at $31,850 for individuals
and $63,700 for married couples. The 35 percent bracket on incomes over
$349,700 would jump to 39.6 percent.

OK, I know what you’re saying:  Wow, you only have to make $32k a year and the Democrats think you’re rich!  Indeed they do.  It’ll give Rush Limbaugh no shortage of material with which to fill up his three hours a day.

What’s more interesting to me is this:  The income threshold for getting jacked up from 25% to 28% happens to be the rough midpoint between the top 50% of taxpayers and the bottom 50%.

Check out the chart faithfully maintained by the National Taxpayers Union that shows what percentage of taxpayers shells out what percentage of taxes.  In 2005 (the most recent data available), the top 50% of taxpayers were those whose adjusted gross amounted to $30,881.  (Yeah, I know, that includes joint filers and thus skews the numbers somewhat.  Just play along with me.)  The bottom 50% earned less than that.

This is what I mean about pitting half the country against the other half.  Note also that the half who make more than $30,881 pay 97% of all the taxes.  The other half contributes essentially nothing.

If this upper half gets bumped from 25% to 28% (and what’s to say McCain wouldn’t sign it? His professed economic ignorance and motley crew of economic advisers lends no hint about what his policies will be), the cultural divisions that have defined American politics since — well, basically since supply-side economics became orthodoxy — will turn to economic divisions in a very quick and ugly way.

Coinciding as it might with the onset of a hyperinflationary depression is more than I care to contemplate this morning on just one cup of coffee.

The Daily Reckoning