James Kwak - James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. More
I'm looking at my 2011 tax return. I paid a Romneyesque effective tax rate (total taxes divided by adjusted gross income) of 14%. Without the Bush tax cuts, I would have paid 19%. And in White House Burning, Simon Johnson and I argue for other changes that would have increased my rate to 25%.
In other words, I wrote a book proposing to almost double my own taxes.
Last year, my wife and I had an unusually large amount of taxable income (unusually large for us, that is, not for either major presidential candidate), for two reasons. One was an unusual capital gain; the other was that we converted most of our traditional IRAs to Roth IRAs, and the entire conversion amount is taxable.* (There were also some royalties from 13 Bankers in there, but they were not nearly enough to make up for the fact that I didn't have a paying job last year.)
My tax rate was 14% mainly for the same reason Mitt Romney's tax rate is 14%: the maximum 15% tax rate for long-term capital gains.** George W. Bush lowered that rate from 20%, the level negotiated by Bill Clinton and Newt Gingrich in 1997 (itself down from the 28% rate set under Ronald Reagan in 1986). That one change reduced my tax rate by 3.4 percentage points. The 2001 reductions in rates on ordinary income also lowered my tax rate by 1.0 percentage point. And the elimination of the personal exemption phaseout (a provision that gradually eliminates exemptions for higher-income households, suspended by the Bush tax cuts) was worth another 0.5 percentage points to me. (Pease--the phaseout of some itemized deductions--had a negligible impact since most of my itemized deductions are already wiped out by the alternative minimum tax.) So, together, the Bush tax cuts reduced my tax rate by about 5 percentage points.
In White House Burning, we argue that the Bush tax cuts should be allowed to expire because this is the most plausible way to increase tax revenues, given the current political situation, and we need those tax revenues to reduce long-term deficits while maintaining Social Security and Medicare. (If the business cycle requires more stimulus, the Bush tax cuts should be replaced by a large, temporary payroll tax cut.) But this will not be enough to close the long-term budget gap, so we make a long list of other recommendations, including a number of tax changes.
Most significantly, we propose to raise the tax rate on capital gains to 28%--the level set by the Tax Reform Act of 1986 and maintained until 1997. That one change would increase my effective tax rate by 5.4 percentage points. We propose to eliminate the exclusion for employer-provided health care (converting half the proceeds into cash rebates for low-income households); this would increase my tax rate by 0.6 percentage points. We would put a floor on charitable deductions, so only donations above the floor would be deductible; that would increase my taxes by 0.4 percentage points. A couple of other provisions would increase them by 0.2 percentage points. (We also propose scaling back the mortgage interest deduction, but I don't have a mortgage, and restructuring the deduction for state and local taxes, but I lose that deduction because of AMT.)
The bottom line is that these additional proposals would increase my tax rate by 6.6 percentage points, bringing my total tax rate well above 25 percent. So why do I want to pay more taxes? Actually, I don't want to pay more taxes individually; my writing a check to the Treasury Department for a few thousand bucks isn't going to do anything. It's our tax code as a whole that needs to change.
Our country faces a serious long-term deficit problem. If we don't increase tax revenues, we will face major cuts to basic government services and to the social insurance programs that most of the middle class relies on. And it's not like to need to raise tax rates to the levels of the 1950s and 1960s. In White House Burning, we propose to return tax rates to mid-1990s levels and to eliminate a number of tax expenditures that are essentially covert government spending. That's mainly what it will take to bring the national debt under control for the next half-century.
And that big tax break I got because of the Bush tax cuts? I'm donating it all to politicians who want to increase taxes on people like me.
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* Even though a Roth conversion increases your taxes today, it still counts as a tax break for the well-off: first, it mainly affects people with significant retirement savings balances, and second, you can only do the conversion if you have access to enough cash to pay the tax.
** I had a slightly complicated situation since I took a small business stock exclusion. That had a very small impact on my actual taxes but a large impact on my AGI--it cuts the capital gain in half but boosts the rate from 15% to 28%. To make things more meaningful, in this column I'm counting the whole gain in AGI (the denominator).
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