So Much Red Ink Comes From Undertaxing the Rich : Deficit: Simply collecting the taxes that the richest 1% paid back in 1977 would solve the problem.

Can the well-off afford to pay higher taxes?

I recently heard Ben Wattenberg of the American Enterprise Institute, an influential neo-conservative, insist that it’s unrealistic to make up the budget deficit by raising taxes on the rich, “because the money just isn’t there.”

As it happens, a recent report by the Center on Budget and Policy Priorities uses census data to analyze just what has happened to income distribution during the past decade. In 1988, the income gap between the rich and the poor, and between the rich and the middle class, reached a record.

But the census data actually understates the degree of inequality, because it counts only household income up to $300,000. The Congressional Budget Office, using data from tax returns, shows an even more extreme degree of inequality.

In 1988, according to the CBO and Citizens for Tax Justice, the wealthiest 1% of Americans received a record 12.5% of the national income, or about $450 billion. The average household in this group enjoyed income of about $452,000.

By contrast, in 1977, before the supply-side revolution, the top 1% of households had just 9.2% of the national income. Since 1977, the annual tax bill paid by the richest 1% has declined by about $50 billion a year, while their income, in real terms, has gone up by 74%.

In short, simply collecting the taxes that the richest 1% paid way back in 1977 would wipe out half of the budget deficit. Raising taxes enough to restore the relative income shares that the top 1% enjoyed in 1977--still a staggeringly disproportionate 9.2% of the income pie--would raise about $130 billion.

That is enough to reduce the federal budget deficit to zero, with money left over for some of the public needs that have been shortchanged during the past decade. Remarkably, that could be done without increasing taxes on 99% of taxpayers.

Alternatively, that tax increase could be applied to the top 5% of households, who have about $900 billion in total income, or more than one-fourth of the total national household income. So the money is obviously there.

Common sense, and a tour of the shopping emporiums of the 1980s, tells you that somebody has a great deal of discretionary income. The new generation of luxury cars being touted carry price tags that exceed the annual income of the average American family.

The opinion-leader class has been bemoaning the disastrous effect of the federal deficit on everything from the national savings rate to the competitiveness of American products. So why doesn’t Congress just go ahead and raise taxes on the small minority of Americans who have benefited disproportionately from the Reagan revolution?

First, a lot of otherwise sensible people have accepted the claim of supply-side economics: Only by allowing the rich to become disproportionately richer will the economy as a whole prosper. The proponents of that view have yet to explain the great boom of the 1940s, ‘50s and ‘60s, when the economy enjoyed record growth and the distribution of income became more equal.

Second, wealthy people in this society enjoy disproportionate political influence along with their high income. The savings-and-loan scandal is partly a story of otherwise liberal congressmen and senators allowing wealth, in the form of campaign contributions, to sway their judgment.

Though the corruption is more subtle, the same can be said of tax policy. In polite political company, seriously increasing taxes on the very rich is considered in bad taste.

Third, a lot of people with relatively high incomes don’t consider themselves rich. An income of $90,000 is enough to get you just inside the top 5%. Members of Congress making $89,500 consider themselves relatively poor. Many voters with somewhat less income anticipate becoming well-to-do some day, and they resent high taxes on their anticipated future status.

Still, it takes almost $200,000 annual income to make it into the top 1%. And that, by any reasonable standard, is pretty well-off. Statistically, most of the increases in real income over the past decade which are shown as going to the top 20% of the population actually went to the top 1%.

If Congress would like to solve the budget deficit, and restore public spending for needs like education and research, which most voters support, there is only one approach that won’t set off another mass tax revolt. Congress has to go where the money is.