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Will taxing the wealthy really work?

A 'Tax Me' booklet lies on table during a news conference where millionaires asked Congress to raise taxes on Capitol Hill November 16, 2011 in Washington, D.C.

President Obama insists that any deal to avoid going over the fiscal cliff must include higher taxes for the wealthy. He has vowed to veto any budget that preserves Bush-era tax cuts for Americans making at least $250,000 a year. That number has proven problematic for Republicans in the past. That's why there’s talk in Washington of a different definition of wealthy, sliding the income number up to a million dollars in hopes of making a deal. In either case, the discussion is about a rather small group of Americans. Just 2 percent make more than $250,000 annually.

Howard Gleckman, resident fellow at the Tax Policy Center, says raising the income bar to a million would have little impact overall, compared to the numerous other tax and spending issues facing America. He also points out that any large-scale budget deal will require much more than higher taxes on the super-wealthy.

“There just are not enough rich people to pay for the government that we say we want,” Gleckman says.

But in the discussion of how to define wealthy, the numbers are only part of the story. Moving up the income threshold might be politically palatable enough to bring about a short-term solution that averts the fiscal cliff and buys time for a larger and longer-term budget deal.

“You end up with not raising the kind of revenue that the president might want for deficit reduction purposes, but the politics are much better,” says tax consultant Clint Stretch.

Even so, any change to the tax burdens of the rich would be only a small part of a budget solution. There will need to be other tough choices, including serious spending cuts to programs both parties love.

Mark Garrison: The income levels we’re talking about represent a rather small group of Americans. Just two percent make more than $250,000 a year. Howard Gleckman at the Tax Policy Center says raising the income bar to a million would have small impact overall.

Howard Gleckman: You are capturing fewer people and therefore you will generate less revenue. It’s not huge amounts of less revenue, but you are gonna capture less revenue.

He also points out that any large-scale budget deal will require much more than higher taxes on the super-wealthy.

Gleckman: There just are not enough rich people to pay for the government that we say we want.

But in the discussion of how to define wealthy, the numbers are only part of the story. Tax consultant Clint Stretch says there’s a factor that may offset the problem of lost money from lower taxes.

Clint Stretch: You end up with not raising the kind of revenue that the president might want for deficit reduction purposes, but the politics are much better.

And the politics are key, since Washington is charged with inventing a solution. Moving up the income threshold might be the move that averts the Fiscal Cliff and buys time for a larger and longer-term budget deal. Thomas Cooke is a professor at Georgetown’s business school.

Thomas Cooke: There does appear to be some bipartisan support for the concept that taxes will have to rise for some taxpayers.

But taxing the rich is only a small part of a budget solution. There will be other tough choices, including serious spending cuts to programs both parties love. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.
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I've had a question ever since the budget stand-off last year:
Why does a higher tax rate on small business owners affect their hiring? If I had a small business that was generating, say, $230,000 profit per year, why wouldn't I want to hire someone to help expand my business, even if (or, especially since,) my personal profit would go up? Are not salaries removed right off the top of my gross income?

Thank you.

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