The Washington Post

How the Bush tax cuts helped the rich get richer

Jan 17, 2012

Chat with Charles Lane of the Post's editorial board on the Bush tax cuts and how they have helped the rich get richer.

Disagree with the Post's editorial board's take on the Bush tax cuts? Ask Charles questions, tell him your opinions and debate the topic with him. You can submit your questions and opinions now.

Read: Bush tax cuts helped the rich get richer

This is Charles Lane of the editorial page staff. Glad to be with you and let's get started.

s the argument here for a social safety net, or has the argument now become income equality? 
There's a difference. - From Post commenter Benson

There is a difference. Whatever your view about govt's role in reversing income inequality, it's probably not practical at this point to talk about going all the way back to the income distribution of 25 years ago. The question then remains of whether we have an efficient safety net that at least prevents the poor from sinking into actual misery.

Apparently, you want to reduce inequality simply by taking more money from rich people. How is some person struggling to make ends meet benefited by raising taxes on the rich? Not one bit, unless you can claim that the extra tax revenue would magically be sent to poor people, which it won't. The inequality obsession of the left is a red herring. Come up with ways to reduce poverty -- increasing the income of poor people should be our concern, not trying to reduce the income of the rich.

Agree there's no point in taxing away top earner's income just for the hell of it, but there are two considerations: one is the cost to social cohesion and democracy when some Americans become so rich that they can essentially buy their way out of the ordinary travails of the community and the other is the cost to economic growth when rent-seeking reaps disproportionate rewards that are not recaptured by the tax code.

Charles, can you also discuss how the Bush tax cuts made the federal fisc richer? From 2003 through 2008, income tax revenue grew at a rate that doubled inflation (see If higher revenue were possible at higher rates, don't you think that taxes would have gone down, and not up, after rates were cut at all levels?

There are two separate issues here: one is the impact of tax changes on revenues/deficits; the other is the impact of tax changes on income distribution. The Congressional Research Service report only addressed the latter.

Since the Bush tax cuts, the proportion of taxes paid by the rich is much higher than it was under the old rates. The amount of money paid for capital gains also went up after the cuts. If the cuts helped the rich get richer, they also took almost half of the people off the tax rolls.

Again, your quarrel would appear to be with the CRS report, which convincingly showed that the net effect of the cuts was to make tax code less progressive -- not regressive, just less progressive.

Can you explain how it came to be that private equity and hedge fund partners went from paying a 35% income tax rate on the service income they derive from managing "other people's money" (OPM in the business) to now paying a 15% capital gains tax on the returns from OPM (other people's money)? It's not their personal capital at risk--it is their investors' capital at risk. They are merely providing a service to manage that money for which they receive income from the profits of that investment. I provide a service too but I don't get to drop to a 15% rate for my income. How is it possible for this absurdity to not get more attention and to be rightly reversed so these fat cats pay the same tax rate on their service income as the rest of us? Would this private equity lobbyist inspired tax treatment expire automatically with the Bush tax cuts at the end of this year?

It's pretty simple: having previously raised the top rate on ordinary income to 35 percent under Bill Clinton, Congress dropped the top rate on long-term cap gains and dividends to 15 percent on George W. Bush. Then the IRS ruled that "carried interest" is capital income, even tho it's a pretty metaphysical distinction. The private equity guys live off the 20 point gap between ordinary and capital income.

What happens when you analyze the data from a welfare perspective rather than an income perspective? How has the value of income + government services changed over the last 30 years, by income bracket?

It's a good question I'd like to answer but which is not addressed in the CRS report I wrote about.

Have there been surveys that indicate what proportion of people understand that the Bush cuts were a benefit to many rich people? If so, what do they say and do you have any comment on the general publc perception as to how benefitted from the Bush tax cuts?

My best sense is that the public is not as distressed about income distribution as you might think, independently of the Bush tax cuts. But they are worried about deficits and believe if anyone's taxes should get raised to reduce govt debt, it should be "the rich."

Why is there only a single rate for capital gains and dividends? Wouldn't adding one or two medium to high brackets allow for an extremely low bracket for the middle class but still incentivize investment?

Actually lower-income people already pay cap gains tax at a lower rate -- it's just that hardly any of them have any cap gains or dividends to begin with. Mitt Romney wants to put the rate at zero on all income below $250,000 per household.

You said it would not be "practical" to return to the "income distribution of 25 years ago." Why make up a straw man? Your own editorial quoted & relied upon the CRS findings, including that "The 1986 tax reform eliminated the gap between the ordinary and capital gains rates. The gap began to widen again during President Bill Clinton’s second term, but the Bush tax cuts of 2003 blew it wide open by slicing the top rate on dividends and long-term capital gains from 28 percent to 15 percent." So there is no need to go backwards "25 years," we could simply return to capital gains rates of nine (9) years ago. What would be so "impractical" about that?

Restoring the tax rates of 25 years ago would not restore the income distribution of 25 years ago.

What are your suggestions for making changes to the current tax rates for income, capital gains and corporations? How can we avoid the rich cutting back on the investments that keep the middle class and poor working, or cause capital flight?

We're a long way from capital flight at the moment, fortunately. To the contrary, US seems to be a safe haven for capital from worried wealthy in the Middle East, Europe, etc. Our basic preference as an editorial page has been to broaden the base of taxation, while lowering rates -- and increasing revenue modestly.

In This Chat
Charles Lane
Charles Lane is a Post editorial writer, specializing in economic policy, financial issues and trade, and a contributor to the PostPartisan blog. In 2009 he was a finalist for the Pulitzer Prize in Editorial Writing. He is the author of two books: "The Day Freedom Died: The Colfax Massacre, the Supreme Court and the Betrayal of Reconstruction" (2008) and "Stay of Execution: Saving the Death Penalty from Itself" (2010). Lane joined The Post in 2000 as an editorial writer, did a stint as The Post's Supreme Court reporter and then rejoined the editorial board in 2007. Previously, he was editor and a senior editor of The New Republic from 1993 to 1999 and a foreign correspondent for Newsweek from 1987 to 1993. Lane studied at the Yale Law School and Harvard College. He is a member of the Council on Foreign Relations.
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