President Obama's new budget is, well, audacious -- not just because it includes several big, audacious initiatives (universally affordable health care, and a cap-and-trade system for coping with global warming, for starters) but also because it represents the biggest redistribution of income from the wealthy to the middle class and poor this nation has seen in more than forty years.
In order to see the whole, you need to look both at where revenues will come from and at where they’ll go:
Come from: By allowing the Bush tax cuts to expire, the marginal income tax on the highest earners goes back to 39.6 percent (from 35 percent, now), and capital gains rates to 20 percent (from 15, now). The budget also limits the amount highest earners can claim for mortgage-interest and charitable deductions (from 35 percent now down to 28 percent), raising an estimated $318 billion over ten years. Finally, wealthier Medicare beneficiaries will have to pay higher premiums for prescription drugs.
Come from, and go: Revenues from a cap-and-trade auction -- the costs of which will presumably will be passed on to all consumers -- will finance a continuation of the middle-class and lower-income tax credits now in the stimulus bill at a slightly higher rate ($500 per individual, $1,000 per couple, phasing out above $75,000 per person).
Go: Although we don't have details as yet, the President's health-care proposal is likely to include substantial subsidies for lower-income families. In addition, let's hope the expanded Earned Income Tax Credit now in the stimulus bill will continue beyond 2010, as well as the refundable Child Tax Credit, enlarged Food Stamp program, larger Title I for poor school districts, and expansion of Pell Grants. (So are, no clear signal on this.)
Presidential budgets are aspirations. They're not real, in the sense that no one really has to adhere to them. Obama's budget now goes to Congress, where budget committees will draw up their own versions. Even these congressional budgets are mere guidelines for appropriations and tax-writing committees. Lobbyists will be swarming. So don't expect the final sausage to look exactly like the meat the President is putting into the grinder. On the other hand, the sausage is likely to bear more than a passing resemblance. Remember: This president's approval ratings are well over 60 percent -- substantially higher than Congress's overall approval rating, and far, far higher than Republicans in Congress -- and the nation is still looking to Obama to lead the way out of our troubled times. And it's a Democratic congress, with a Democratic Senate that could be (if Al Franken is seated) one vote short of being able to cut off a filibuster.
It's about time a presidential budget unequivocally redistributed income from the very rich to the middle class and poor. The incomes of the top one percent have soared for 30 years while median wages have slowed or declined in real terms. As economists Thomas Piketty and Emanuel Saez have shown, the top-earning one percent of Americans took home eight percent of total income in the 1970s; as recently as 1980, they took home nine percent. After that, total income became more and more concentrated at the top. By 2007, the top one percent took home over 22 percent. Meanwhile, even as their incomes dramatically increased, the total federal tax rates paid by the top one percent dropped. According to the Congressional Budget Office, the top one percent paid a total federal tax rate of 37 percent three decades ago; now it's paying 31 percent.
Fairness is at stake but so is the economy as a whole. This Mini Depression is partly the result of a widening gap between what Americans can afford to buy and what Americans, when fully employed, can produce. And that gap is in no small measure due to the widening gap in incomes, since the rich don't devote nearly as large a portion of their incomes to buying things as middle and lower-income people. The rich, after all, already have most of what they want.