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August 20, 2014

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What happened to the 20 percent?

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This has been the Year of Percentages. It started off with the Occupy movement, which declared “we are the 99 percent,” as they railed against the 1 percent. Then, at a private fundraiser, Mitt Romney bad-mouthed the 47 percent who don’t pay federal income taxes. Then Romney lost to President Barack Obama, who campaigned on a pledge to raise taxes on the top 2 percent — individuals earning more than $200,000 a year or couples earning more than $250,000 — while leaving the rest of us alone.

As the year draws to a close, Republicans are fighting that plan. Obama is at an impasse. If they fail to reach a deal, taxes will automatically go up for everyone. That brings me to perhaps the most important — and least talked about — group of all: the 20 percent.

I hadn’t thought much about 20 percenters until a tax-guru friend explained President Obama’s predicament to me a few months ago. Obama was campaigning on a platform of taxing the ultra-rich, which sounded great to 98 percent of voters.

“But there’s a problem,” my friend said. “Most of the money in the country is still, thankfully, in hands of the people making between $100,000 to $300,000. To really address our long-term financial issues, you either have to raise taxes on them — the top 20 percent — or address entitlements in a serious way. Or both.”

Darn. I wish squeezing more money out of the very rich would solve all our fiscal woes, but it turns out that there just aren’t enough of them. Fewer than 3 million taxpayers reside in their lofty ranks. Raising taxes on them would help a lot. But in the long run, we’d still come up short. Maybe half a trillion dollars short. Meanwhile, 28 million taxpayers exist in the top 20 percent. You could call this group the upper-upper-middle class. The quasi-rich. Or the lower-wealthy. (You 20 percenters out there probably don’t feel like fat cats, but in a country with a median household income of $50,000, you are.)

Taxing the very rich can work for now. But in the long term, it is impossible to envision a solution that does not include 20 percenters paying more taxes, working more years, or taking less in Medicare or Social Security. “We can’t solve all our fiscal problems just from the top 2 percent,” said Marc Goldwein, senior policy director at the nonpartisan Committee for a Responsible Federal Budget. I suspect the budget trolls hunched over their calculators at the White House know this. But nobody in Washington really wants to admit it.

Maybe that’s the beauty of the position that Obama is in right now. He doesn’t have to touch the 20 percent, the group that will groan the loudest. If Republicans continue to reject his plan to tax the very rich, all he has to do is sit back and watch the rates rise magically on their own.

Republicans, many of whom have signed no-new-tax pledges, have their own perverse incentive to let tax rates go up. If they strike a deal with Obama to raise taxes now, they might suffer some Grover Norquist curse. But if they let the automatic tax hike machine kick in on Jan. 1, they could strike a deal the next day to lower the rates.

Who knows whether our leaders in Washington will see fit to make a grand bargain on taxes and spending before the Jan. 1 deadline? It would be far better to strike a deal now, before the markets lose faith in us and our economy heads down Niagara Falls in a barrel. But it will be easier to get a deal later.

Maybe, just maybe, the plunge would be good for us. Maybe it would sober our leaders up enough to forget their campaign promises and come up with a deal that is good for the country, not just their own political futures.

Most analysts say the ideal plan would minimize the economic pain in the short run while the economy is still weak but crank up shared sacrifice later, after the economy recovers.

And when I say shared sacrifice, I do mean shared. Not just by the very rich, or the very poor, but you, too, 20 percenters.

Farah Stockman writes for the Boston Globe.

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