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Tax is not really an economic bad word

WASHINGTON — Nothing has been more damaging to rational discourse about economic policy than the notion, peddled relentlessly by Republican conservatives and accepted by too many centrist Democrats, that raising taxes is always and everywhere bad for the economy.

Mind you, there's very little evidence supporting this view — it's an article of faith and a convenient way for politicians to pander to their constituents. What we can say for certain is that, in the context of the political debate in Washington, the impact of tax changes is almost always overstated.

The reason I mention all this is because the liberal leadership of the House wants to pay for health-care reform in part by imposing an income tax surcharge on households earning more than $350,000 a year.

Personally, I don't think that's a good idea. We're already spending — and wasting — so much more than any other country on health care that we can surely pay for universal coverage within existing health expenditures. What's needed is not more money but the political will to lower the costs of the health-care system while redistributing its benefits.

But lacking that political will, the next-best option is to pay for health reform by raising taxes. And given the increasingly unequal distribution of income, it makes both political and economic sense to raise most of that money from upper-income households.

Republicans' new antitax tirade claims that imposing a surtax on top earners' personal income will be disastrous because that is the rate — not the corporate rate — at which most small businesses are taxed. And because small businesses create all the new jobs, that's amounts to a tax on job creation.

Problem is, small businesses don't create all the new jobs. Most job creation comes from relatively few companies that start small and get big rather fast. The percentage of Americans employed by small business has increased only modestly over time.

As to that Democratic surtax, it turns out that most of it would not come from small business and most small businesses would not be subject to the surtax.

According to data compiled by the Tax Policy Center at the Urban Institute and Brookings Institution, only 23 percent of taxpayers who would be subject to the surcharge derive most of their income from business profits. Most of the proposed surtax would be paid by doctors, lawyers, investment bankers, corporate executives and people with lots of investment income.

Moreover, of the roughly 13 million taxpayers who derive most of their income from business profits, fewer than 500,000 would be subject to any surtax at all — and of those, fewer than 100,000 subject to the full 5.4 percent surtax.

That 5.4 percent rate, by the way, kicks in only after a taxpayer's income (salary and profits) rises above $1 million, which would typically be a business with more than $10 million in revenue and more than 100 employees.

That's hardly the small, cash-strapped startup that animates the Republican antitax fantasy.

Tax is not really an economic bad word 08/02/09 [Last modified: Sunday, August 2, 2009 4:30am]
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