Maintaining the president's higher spending levels will require raising taxes for all Americans, including an 11 percent increase on those earning less than $200,000, writes Glenn Hubbard, economic adviser to Mitt Romney.
The defeat in the Senate of the so-called "Buffett Rule"—that targets millionaires for a tax increase—marks one more step in the election-year discussion about raising taxes on higher-income individuals to close the nation's yawning budget gap.
Since 2008, a rising share of the economy—an estimated 24.3% of GDP in 2012, according to the Office of Management and Budget, up from 20.8% four years earlier—has been devoted to federal spending. The problem gets much worse. The Congressional Budget Office estimates that, absent changes in policy, the nation will spend 10 percentage points of GDP more on Social Security, Medicare, Medicaid and related programs in 2058 than it does today.
President Obama's budget proposes to continue elevated levels of federal spending relative to GDP. So how does the president propose to pay for this?
We are told that the answer is to raise taxes on upper-income workers. Let's put aside that tax-reform advocates, including the Bowles-Simpson Deficit Commission appointed by President Obama, argue for reducing marginal tax rates, making up lost revenue by broadening the tax base. Let's focus on the arithmetic of the president's tax strategy—the Buffett Rule, plus tax increases on dividends and capital gains, plus raising the top income-tax rate to its pre-2001 level.