The White House and most Democrats want to extend the Bush tax cuts for the first $200,000 of income ($250,000 for couples filing together), but to let income taxes rise to 2000 rates starting with the $200,001st dollar. Republicans have strongly opposed the Obama plan, arguing that nobody’s income taxes should rise and that Congress should make the cuts permanent. (That would cost something like $3.7 trillion over the next 10 years, and would ultimately reduce GDP, the CBO says.)

Rivlin and some legislators, including Sen. Jim Webb (D-Va.), have indicated support for raising taxes starting at a higher level — perhaps $1 million. Paletta writes:

Ms. Rivlin said in an interview that lawmakers and administration officials should consider temporarily exempting everyone who makes less than $500,000-a-year from a higher tax threshold. This is higher than the $250,000 level the White House has proposed but less than the $1 million some lawmakers on Capitol Hill have recently proposed. There is also a large group of lawmakers who have said the tax cuts should be extended for all income levels for at least two more years.

Ms. Rivlin said her proposal would “cut a deal” on the definition of “high income.”

“There would be few people that believe $500,000 is not a lot of money,” she said.

Ms. Rivlin has served as director of the Congressional Budget Office, director of the White House Office of Management and Budget, and vice chairman of the Federal Reserve. She is a senior fellow at the Brookings Institution in Washington.

That’s the conclusion of a report released by the National League of Cities today. Property tax revenue rose 4.2 percent last year. This year, cities expect revenue to fall 1.8 percent — meaning hundreds of billions of dollars less for schools, roads, police officers and other local-government services. And the worst is yet to come.

That is because income tax works directly: You and your employer inform the government how much you make, and transfer a set percentage. But property taxes are based on assessments — essentially guesses about the value of the property. Those assessments take time, and are imprecise. Housing values have been in sharp decline, and continue to fall in many parts of the country, and local governments are only now accounting for that.

The loss of property tax revenue, combined with shrinking sales tax revenue, means that cities will take in 3.2 percent less this year, the biggest downturn since the NLC started keeping track.

“These stark numbers continue the trend we’ve been seeing for the past several years: lower revenue and reduced services at a time when there is an increased demand for services,” the report’s co-author, Christopher Hoene, said in a release. “Unfortunately, because of the loss in revenue, cities will face even more difficult circumstances in the months, if not years, to come.”

To be honest, the testimony isn’t the easiest to understand. It is pretty wonky, and the descriptions of the impact on government revenue, gross national income, employment and dozens of other factors become pretty arcane.

But the analysis ultimately argues that making the Bush tax cuts permanent would not benefit the economy in the long run:

Permanently or temporarily extending all or part of the expiring income tax cuts would boost income and employment in the next few years relative to what would occur under current law. However, even a temporary extension would add to federal debt and reduce future income if it was not accompanied by other changes in policy. A permanent extension of all of those tax cuts without future increases in taxes or reductions in federal spending would roughly double the projected budget deficit in 2020; a permanent extension of those cuts except for certain provisions that would apply only to high-income taxpayers would increase the budget deficit by roughly three-quarters to four-fifths as much. As a result, if policymakers then wanted to balance the budget in 2020, the required increases in taxes or reductions in spending would amount to a substantial share of the budget — and without significant changes of that sort, federal debt would be on an unsustainable path that would ultimately reduce national income.

I think this analysis is a bit easier to understand in graphs, which the CBO provides. Over the next two years, extending some or all of the tax cuts helps the economy, boosting the gross national product anywhere from 0.2 percent to 1.9 percent. (In the chart, “partial” means Congress has said the cuts will expire in 2012, and “permanent” means Congress has said income taxes will not go up.)

But by 2020, any extension of the cuts will prove bad for the economy, because of the burdens of the national debt.

But extending the tax cuts for just two years obviously has a much smaller impact than making the income tax cuts permanent, which would cut economic growth.

Sen. Tom Harkin (D-Iowa) told reporters that Republican threats to block a vote unless Democrats extend all the tax cuts, including for the wealthy, make the timing impossible.

“It’s my understanding from talking with other Senators…that the clock’s running out,” Harkin said. There’s just no way we can get anything done on this before then because of Republican intransigence on this issue.”

And the House wants the Senate to vote first, meaning, it seems, no votes until the lame duck session.

Obama said he wouldn’t raise taxes on people making under $200,000 (or $250,000 for couples, but lets forget about them for simplicity’s sake). That’s [adjusted gross income] — translated to taxable income, that’s $195,550. Problem is, the 33 percent bracket, which is scheduled to rise to 36 percent under current law, includes income down to $171,850. So for the income between $171,850 and $195,550, Obama actually bumped that marginal rate down into the lower 28 percent bracket. So, it’s correct that the taxes on that last dollar will increase by 3.6 cents, but on the $23,700 before it, taxes will drop by about $1,185.

In other words, your total tax burden will fall by $1,184.96. In order to fully break even, you’ll need to make $39,500 above the cut-off, and only taxpayers above that will see their tax burden increase.

There you have it. If you’re an individual, you’ll need to make $239,500 a year before you’ll see your taxes go up by pennies.

Here’s how it works. Your taxes below $250,000 remain the same. And on that excess $1, your income tax rate increases from 33 percent to 36 percent. For most earners making between $250,000 and $500,000 a year, the Obama plan would increase income tax liability by just a few hundred dollars — an average of $600, according to the Center for Economic and Policy Research’s Dean Baker.

But those few hundred dollars proved the straw that broke the camel’s back for Todd Henderson, a professor at the University of Chicago. He and his wife, apparently a pediatric oncologist, pull in about $400,000 a year — or, at least, somewhat more than $300,000, a sum that puts them comfortably in the top 2 percent of American wage earners. They are rich. But, Henderson writes, they aren’t really rich. They are “just getting by.”

The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.

I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t. …

[T]he president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.

The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home.

He then runs through his expenses: Income taxes, a mortgage on a million-dollar home, property taxes, private school for three kids, payments on a $250,000 education loan for his wife’s medical-school education, retirement savings in a 401K savings plan and the stock market, and then “insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels).” He says he and his wife have just a few hundred dollars left over after that.

Of course, this family’s taxes actually won’t increase by that much. As I wrote above, they can expect a tax hit of just a few hundred dollars — and if they hired an accountant (it is not that expensive), I am sure he or she would help the couple actually save more than that.

Nevertheless, Henderson still might not feel rich. And the Obama tax hike has nothing to do with it. Henderson does not conceive of himself as rich because his fixed costs are too high, meaning he has little leftover cash and little say over where his remaining few hundred dollars go. But Henderson’s actual richness means he has hundreds of decisions he could make to free up more money for leisure and random spending. Here’s a quick list I drew together:

1. Put his children in public schools.
2. Move his children into less-expensive private schools.
3. Sell both of the family’s cars, and buy one cheaper car and take public transportation and cabs.
4. Sell one of the family’s cars and buy a bicycle. Also cancel gym membership, since biking is great exercise.
5. Seal his basement or garage and rent it out.
6. Sell his and his wife’s wedding or engagement rings.
7. Sell any artwork, decorative rugs, or useless, expensive wedding gifts collected.
8. Cancel gym memberships and take up jogging or use exercise tapes.
9. Demand a lower APR and higher interest rate from the family’s credit card and bank.
10. Switch the family to a vegetarian diet.
11. Draw down on the 401K.
12. Save less.
13. Teach an extra class.
14. Sell three pieces of pricey furniture and replace them with cheaper furniture.
15. Find a cheaper babysitter.
16. Go through the closet and remove clothes the family does not wear. Consign them.
17. Sell his house and move somewhere cheaper.
18. Refinance the mortgage.
19. Do his own lawn work — or, better yet, do no lawn work at all.
20. Paint his roof white to cut down on heating and cooling costs.

Were Henderson not actually rich, this list would be much shorter. One way or another, $600 in taxes — $50 a month — is neither here nor there for determining this family’s wealth.

Given that Democrats control the Senate, McConnell cannot bring his bill forward. That means it will not receive any votes unless a Democrat does so for him.

Here’s the full text of McConnell’s statement on the tax cuts. It clearly lays out the Republican line on the matter: Democrats have spent and spent and spent but have not lowered the unemployment rate, so why let them raise taxes on hardworking Americans and small businesses just to let them continue to do the same? It also cites the opposition of Sen. Joe Lieberman (I-Conn.) — as well as Democrats Ben Nelson (Neb.), Evan Bayh (Ind.), Kent Conrad (N.D.) and Jim Webb (Va.) — to letting taxes rise for the wealthiest Americans. Without those senators, plus one Republican, on board, a two-year extension of all the tax cuts seems most likely.

For the past 19 months, the American people have waited patiently for the Obama administration and Democrats in Congress to help them turn the economy around. And time and time again, the administration and its allies in Congress have turned a deaf ear.

Rather than implement the policies that would free up capital, lead to investment, and create good, lasting, private-sector jobs, Democrats in Congress have passed one sweeping, government-driven scheme after another, then asked taxpayers to put it on their tab. A stimulus bill that was supposed to be timely, targeted, and temporary turned out to be a liberal wish-list. Instead of stimulating the economy and keeping unemployment below 8 percent, as promised, we stand here today with nearly 10 percent unemployment nationwide and many more Americans struggling to find full-time work. A health care bill that was supposed to lower costs is doing the opposite. As I’ve repeatedly said in the past, and as a new government report confirmed just last week, the President’s health care plan will bend the cost curve up — not down. And a financial regulatory bill that was supposed to protect Main Street is being embraced by some of the biggest players on Wall Street, while small town bankers and retailers brace themselves for the costly and burdensome rules and regulations it will impose on them.

Every one of these bills came at a steep price to the taxpayer. And until now, Democrats have been content to borrow the money, to simply pile it on to the debt.

Well, now comes the second half of the story, the final piece of their agenda — the part where they point to all that spending and demand payment for it, where they try to make it all permanent. Democrats spent the last two years putting government in charge of health care, the financial sector, car companies, insurance companies, student loans — you name it. Now they want the tax hike to pay for it all.

Americans asked the administration to fix the sink, and they remodeled the house instead. And now they’re sending us the bill.

This was their plan all along: force these massive programs through, drive up the debt, call it a crisis, then demand that people pay their ‘fair share’ to dig us out. It starts with small business owners, but I assure you it won’t stop there, because if Democrats spent this much money in the middle of a recession, they’ll borrow and spend even more once we’re out of it. The President admitted as much last week on national television when he said that the tax hike he’s asking for won’t be used to pay for any of the things he’s already done. He’ll use the money from these tax hikes to spend on other things; on “better things,” as he put it.

Well, we’ve seen the so-called “better things” Democrats want to spend taxpayer money on — a stimulus bill that’s funding research on interpretative dance and monkeys; a health care bill that cut Medicare and increased premiums; and a financial regulatory bill that hires more of the same kind of Washington bureaucrats who missed the last crisis.

Americans have had it.

They’re tired of Democrat leaders in Washington pursuing the same government-driven programs that have done nothing but add to the debt and the burden of government. We can’t allow this administration to demand that small business owners in this country pay for its own fiscal recklessness. And that’s why I’m introducing legislation today that ensures that no one in this country will pay higher income taxes next year than they are right now.

We can’t let the people who’ve been hit hardest by this recession and who we need to create the jobs that will get us out of it foot the bill for the Democrats’ two-year adventure in expanded government. We can’t allow America’s job creators to pay for Democrats’ out-of-control spending over the past two years any more than we can allow Main Street to pay for the greed of Wall Street. Wall Street should pay for its own excess. So should the administration and Democrat leaders in Washington.

The good news is that a growing chorus of Democrats, including at least five here in the Senate, are coming round on this issue. They oppose the tax hikes the administration is proposing. As Senator Lieberman put it earlier today, “I don’t think it makes sense to raise any federal taxes during the uncertain economy we are struggling through. The more money we leave in private hands, the quicker our economic recovery will be.”

I couldn’t agree more. Only in Washington could someone propose a tax hike as an antidote to a recession. And this is no small tax hike. The tax hike the administration is proposing, according to the IRS, would apply to half of all small business income in this country. And an analysis by the National Federation of Independent Business shows that businesses that employ 20 to 250 people would be hardest hit. All told, according to the nonpartisan Joint Committee on Taxation, hundreds of thousands of small businesses would see their taxes go up next year under the administration’s plan.

Here’s the bottom line: no recovery will take place until the government stops over-spending. No recovery will take place until government stops imposing new regulations and costs on business. No recovery will take place if we impose new taxes on the people we need to create jobs.  Democrat leaders need to listen to what the American people have been shouting at us for the past 19 months: the reckless spending has got to stop. So far, they’ve made no concrete concessions. But now it’s time they join Republicans, stand up to the administration, and declare that the spending spree is over.

That’s the first step on the road to recovery. As for the next step, Republicans stood together just before the August recess and put together a plan that would save taxpayers $300 billion over the next 10 years. That’s a good place to start.

So Democrats have a choice: they can stand with us on this proposal and show that they finally realize we can’t spend our way out of the recession. Or they can continue to stand with an administration whose policies — real and threatened — represent the greatest obstacle to our nation’s economic recovery.

Let’s face it: the Democrat agenda has been disastrous for the economy: two and a half million jobs lost: two and a half trillion dollars more in debt, more job-stifling regulations, mandates, and red tape. And now they want to drive another nail in the coffin — a massive tax hike on the very people who will dig us out of this recession by expanding their businesses and creating jobs.

Republicans are offering a choice: more of the same or the new direction Americans are asking for.

But Reihan’s objections only solidify my belief that more tax brackets — for the top one percent, or millionaires, or folks making $10 million and up a year — are a good thing.

First, let’s reiterate the central argument for new tax brackets: The rich have gotten richer. A lot richer. (For a really excellent examination of the United States’ income inequality problem, see Timothy Noah’s series at Slate.) Larry Mishel of the Economic Policy Institute explains the changes since 1979, a period some economists call the “Great Divergence”:

“[B]etween 1979 and the start of the current recession in 2007, the pre-tax incomes of the upper 1 percent grew 214 percent, while the incomes of the middle-fifth and lowest-fifth grew, respectively, 25 percent and 4 percent… [T]his extremely unbalanced growth implies that 38.7 percent of all of the income growth accrued to the upper 1 percent over the 1979-2007 period: a greater share than the 36.3 percent share received by the entire bottom 90 percent of the population.”

Indeed, income inequality increased through the 2000s — with the super-rich getting super-richer. This created what Matt Miller has elegantly described as a “lower upper class” — filled with doctors and lawyers and other professionals.

Part of the hesitancy with hiking taxes on the rich, I think, stems from the birth of this “lower upper class.” Americans do really want to soak the rich. But a household headed by a well-paid nurse and a police chief might make $250,000 a year, the income point at which President Obama wants to let taxes rise by letting the Bush tax cuts expire. My guess is that most Americans want to raise taxes on these guys, but not on that nurse and police chief, whose wealth seems reasonable and attainable.

Of course, the income tax is progressive: The rich bear a much greater burden than the poor. Reihan flags this finding from the Tax Foundation showing the phenomenon:

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

But let’s look more closely at those numbers. In 2004, the top 1 percent paid 39.6 percent of federal income taxes and made 19 percent of adjusted gross income (AGI). In 2007, that same top 1 percent paid 40.4 percent of federal income taxes and earned 22.8 percent of AGI. Another way to say that is: The top 1 percent’s share of AGI grew 20 percent, but at the same time the top 1 percent’s share of income taxes grew just 2.02 percent.

But Reihan looks at those numbers and sees something different: “This strikes me as fairly important. If the top 1 percent is responsible for 40.4 percent of revenue from federal individual income taxes, a new top rate will presumably increase revenue volatility, as income at the top of the distribution tends to fluctuate with the business cycle.”

Onto the case against creating a new bracket, then.

Reihan is right about this point. The wealthy earn a lot more income from sources like investments, commissions, bonuses and housing sales. Lower- and middle-income Americans make a much higher proportion of their income from wages and salaries. Therefore, income among the wealthy tends to be more volatile, and tends to change more dramatically with the economic tides. That means government revenue from an income tax becomes more volatile the more progressive it is.

But he is wrong about what it means. As we’ve learned through this recession, revenue volatility is a massive problem for states, since they cannot run budget deficits. It is less of a big deal for the federal government, which can run as big a deficit as it wants and as Congress authorizes. Over the next, say, five years, I doubt that additional volatility due to a more-progressive income tax would impact the federal government at all.

Reihan’s second point is that a more-progressive income tax, the kind I laid out, would not raise that much money. This is neither here nor there. It would raise billions of dollars. A dollar is a dollar. And at some point, the government needs to raise money from somewhere. Given the dramatic growth of income inequality, I would argue raising income taxes a bit on the very wealthy is a decent place to look. (Reihan also quotes Alan Viard arguing that increasing income taxes also increases the disincentives to earn. I don’t debate this, but also don’t see it as terribly relevant. The Laffer Curve bends somewhere, but not at 39.6 percent.)

Then, the third point. Reihan cites Monica Prasad’s The Politics of Free Markets, a “history of neoliberal reform efforts in the U.S., Britain, France, and West Germany.”

At the time of the oil crisis in the 1970s, American and British tax policies were more punitive to business and the wealthy than the tax policies of France and West Germany; American and British industrial policies were more adversarial to business in key domains; and while the British welfare state was the most redistributive of the four, the French welfare state was the least redistributive. Prasad shows that these adversarial structures in the United States and Britain created opportunities for politicians to find and mobilize dissatisfaction with the status quo, while the more progrowth policies of France and West Germany prevented politicians of the Right from anchoring neoliberalism in electoral dissatisfaction.

He concludes: “[A] more steeply progressive income tax increases the political risks posed by a dramatic expansion of social budgets. That is, the left-wing is inadvertently aiding the right-wing. Some will be amused by the cosmic justice of it all. I’m more concerned about deadweight loss.”

I appreciate his concern for the left, but still fail to see how this means we should keep the top income tax rate for the guys making billions the same as the top income tax for our nurse and police chief.

The economist who first theorized that high taxes reduce government revenue at some level is Arthur Laffer, and the point at which higher taxes mean less government revenue is where the so-called Laffer curve “bends.” The theory of the curve underpins some Republicans’ arguments about taxes: Higher taxes discourage people from striving to earn more, so tax cuts pay for themselves, Sen. Mitch McConnell (R-Ky.) argues. (Notably, this is wrong at the United States’ level of taxation, meaning the United States is on the left-hand side of the Laffer curve.)

Nobody really knows where the Laffer curve bends — but Dylan Matthews thought to ask a number of tax policy experts, economists and politicians. It is a great post and worth reading in full. But here are some particularly good responses.

Bruce Bartlett, columnist, Forbes.com; former adviser to Reagan and Bush I:

“I would hate to venture a specific number…. I would, however, say that I think the top rate could be quite a bit higher than it is without significantly impairing incentives or leading to excessive amounts of tax avoidance. I think 50 percent is an important threshold and I would be very reluctant to go higher even if it raised net revenue…. Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue…The European Central Bank…finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates.”

“Since our rates are much lower than those it Europe, it suggests that we have a very long way to go before the top rate became counterproductive.”

Greg Mankiw, Robert M. Beren professor of economics, Harvard University; former chairman, Council of Economic Advisors:

“My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate…. I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer.”

Edward Lazear, Jack Steele Parker Professor of Human Resources Management and Economics, Stanford University; former chariman, Council of Economic Advisors:

“Sorry, no.”

Senate Minority Leader Mitch McConnell (R-KY):His office declined to answer.

But most of the increase since the mid-1990s in the number of people who owe no income taxes is the result of the child tax credit. This policy was created by Congressional Republicans and expanded with Republicans in the lead.

To boot, he goes through a timeline of the changes.