Make the Wealthy Pay Their Fair Share to Balance the Budget

Treasury Secretary Tim Geithner is the Obama administration's point man for selling the idea that letting tax rates for the wealthy return to where they were under President Clinton will be good for the U.S. economy. In response, the Republican party is arguing that raising taxes on the richest 2% of Americans will hurt small business.

The simple reality is that when George W. Bush cut $1.3 trillion in taxes back in 2002, 36.7% of the money went to the top 1% of Americans. If those Bush tax cuts are allowed to expire and we could stop spending so much on the war in Iraq that he started, Republicans would get something they claim to want: a balanced budget. Can the GOP have it both ways?

Geithner called the Republican position -- that we should extend the tax cuts for the wealthiest 2% -- "a $700 billion fiscal mistake," according to the The Washington Post. By contrast, Geithner supported the extension of tax cuts for families making less than $250,000 a year. Meanwhile, Republicans argue that ending tax breaks for the top 2% could imperil "businesses that employ as many as 30 million workers," reports the Post. Geithner countered that letting the top-level tax cuts expire would affect at most 3% of small businesses.

But Republicans have been known to complain about budget deficits and the government debt. Some are even joining a White House commission "tasked with winding down trillion-dollar deficits," according to The Hill. Not surprisingly, members of that commission have different views on how to achieve that: Democratic members are pushing for a combination of revenue increases and cuts in spending, whereas Republicans want just the spending cuts.

Deficits, Debts and Delays

The Congressional Budget Office projects revenue will rise to 19% of GDP under the scenario in which the tax cuts for the middle class are extended, while tax rates on the top 2% go back to where they were during the Clinton administration. This is slightly above the 18% average, according to The Hill.

For those who are seriously concerned about the deficit, the numbers suggest that a combination of letting expire the tax cuts for the top 2% combined with winding down spending on Iraq could go a long way to balancing the budget. But the Republican mid-term strategy depends on denying as many accomplishments to the Obama administration as possible.

Given that, it's likely that the Republicans will make a great effort to impede Geithner's efforts -- or at least delay them until after the November elections so that they can get more of the spending cuts and tax cuts that they want.

Interestingly, PIMCO has concluded that deflation is imminent: Its CEO, Mohammad El-Erian, has said he thinks there's a 25% chance of deflation and a double-dip recession. That doesn't really bode well for those whose planning is based on fears of rampant inflation due to the deficit and debt. Instead, it suggests that the worries about out-of-control inflation caused by the government printing endless quantities of money are misplaced.

Perhaps investors will conclude that the bigger risk we face is deflation, and Geithner's position will prevail -- leading to a more balanced budget.