Why the Party Is Ending for the Rich
It has been a great decade to be rich.
Since 2001, high earners have enjoyed the best of all worlds. Tax rates at the top of the income ladder have drifted down to the lowest levels since World War II. Incomes have stagnated for the middle class, but they’ve continued to rise for the wealthy. And recent policies meant to combat the recession and the 2008 financial crisis have benefited the wealthy more than others.
In the stock market, a “correction” usually sets in when stock values get ahead of underlying fundamentals. Something similar is about to happen to the wealthy.
President Obama has been hammering at this theme since his first presidential campaign in 2008, arguing that taxes should rise for those who earn more than $250,000. His latest plan involves the “Buffett Rule,” which would set a minimum effective tax rate of about 30 percent for those with incomes of $1 million or more, who usually pay a lower rate.
It’s hardly surprising that a Democratic president would push for higher taxes on the wealthy. But look what else is happening: Obama’s most likely opponent in this year’s election, Mitt Romney, has suggested that he’d reduce or eliminate some generous tax breaks for the wealthy, as part of his plan to fix Washington’s broken finances. From the perspective of the person paying the taxes, a tax hike and a reduced tax deduction are effectively the same thing, since both lower your after-tax income.
[See why raising taxes on the rich is so hard.]
Romney made those suggestions during a speech in front of a private audience with supporters, which the general public wasn’t supposed to be privy to. His campaign is downplaying Romney’s suggestions, saying the candidate was just free associating during a candid Q&A. But Romney, like anybody else who understands the government’s messed-up finances, knows that a huge reckoning is coming, and it’s inevitable that the wealthy are going to have to pay more.
Simple math dictates that Washington’s debt-fueled spending binge of the last decade has to end. If Washington doesn’t pre-emptively reduce the nation’s $15 trillion debt, global financial markets will force it to happen, in a messy and disruptive way. Any politician who says it can be done by simply raising taxes on the wealthy, or cutting spending, is lying. The size of the problem is so large that fixing it will require a combination of higher taxes and reduced government benefits that will affect most Americans.
Since it’s an election year, no candidate is going to tell voters the truth about what really needs to be done. It’s even less likely that Congress will pass any meaningful new laws this year to address the problem. But the starter proposals floated by both Obama and Romney signal a dawning awareness that Washington’s budget woes need to be addressed soon.