Who Should be Held Harmless for Deficit Reduction?

At some point, once the unemployment rate really starts to fall, the US needs to get on a steady-state path to deficit reduction. A question worth asking is what part of the income distribution should contribute to this reduction. Certainly the one percent should make the major contribution, but it is hard to see how it can close the gap by itself.

The current budget deficit is about $1.3 trillion. According to IRS SOI data for 2009 (the most recent available), households in the top one percent paid income taxes of $318 billion in that year (see Table 5). Because that was an anomalous year, let’s go back to 2007, when the top one percent paid the most is had paid under current law, which was $451 billion. If we adjust that for five years of CPI growth, that translates to about $497 billion in current dollars. This means that doubling taxes on the top one percent would get us less than halfway toward closing the budget gap.

Of course, lower unemployment will mean less money going to unemployment insurance, and will add to the number of taxpayers, and these will help reduce the deficit. But the taxing the one percent alone will not be enough–so how low do we go? I would certainly hold the bottom two quintiles harmless–whatever mix of tax and spending changes come along, that group should be left no worse off than before (because they received no net benefit from the policies of the past decade or so). How one divides it up among the rest? I am not sure.

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About Richard K. Green 103 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

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